The Impact of Interest Rate Changes on Financial Markets: A Mathematical Study

Abstract

Purpose: This study investigates how fluctuations in interest rates influence corporate financial decisions, focusing on borrowing costs, profitability, and expansion plans across sectors in the Indian economy. It also examines the implications of the Fisher Effect, which relates nominal interest rates to inflation, and how data accuracy impacts its application in corporate strategy and forecasting. Research Methodology: The archival data analysis technique to fetch data from Deloitte, McKinsey, Statista along with Descriptive analysis and supporting literature aligned each objective of the Research paper. The study is based on scholarly articles from the IEEE and Scopus database highlighting the major findings. The paper further reviews the actual implementation of  interest rate fluctuation through a case study method comparing  two companies: LMF Ltd., a large manufacturing firm with significant long-term debt, and InnoTech Pvt. Ltd., a tech startup dependent on short-term loans for growth. Findings: LMF Ltd. was significantly affected by rising interest rates, with increased borrowing costs leading to reduced profitability and delayed expansion plans. InnoTech, however, managed to maintain profitability and continue expanding despite rising interest costs, due to rapid growth driven by innovation. The Fisher Effect was observed, but inconsistencies in data weakened its application. Originality/Value: This study highlights sector-specific responses to interest rate changes and emphasizes the importance of accurate inflation and interest rate data for effective forecasting and corporate decision-making.