India's 6.44% CPI Inflation: Implications for Startup Economy

This article explains how rising interest rates affect different assets, including bonds, stocks, real estate, and commodities, which can ultimately lead to decreased funding and valuations for startups.

Shubham Gaurwal
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India's economy has remained relatively stable amidst the rising inflation crisis that has swept across much of the West and Europe. According to February 2023 data, India has reported a Consumer Price Index (CPI) based inflation of 6.44 percent, slightly above the Reserve Bank of India's (RBI) target of keeping inflation below 6 percent. 

However, even though India's interest rates and inflation are comparatively low, they can still affect consumer behaviour, leading to a tougher time for businesses, especially Startups.

India's 6.44% CPI Inflation: Implications for Startup Economy

The impact of rising interest rates on the economy is far-reaching and affects every aspect of it. Interest rates are the cost of borrowing money and play a crucial role in determining consumer and business spending patterns. When interest rates are low, borrowing is cheaper, and spending increases, leading to economic growth. However, when interest rates rise, borrowing becomes expensive, and spending decreases, leading to an economic slowdown.

Also Read: Top Startups in India Are Tech Driven - RBI

Inflation and Bond Yield 

Bonds are the most affected asset when interest rates rise, as existing bonds become less attractive compared to new bonds offering higher returns. This leads to a decrease in bond prices, and the same happens with stocks. As companies have to pay more interest on their borrowings, their revenue and profits decrease, leading to a fall in stock prices. Investors prefer new bonds as they offer better returns with lower risks, leading to a withdrawal of money from the stock market, further leading to falling stock prices.

Inflation and Real Estate Prices 

Rising interest rates heavily impact the real estate sector. When borrowing costs for loans increase, demand for purchasing properties decreases, leading to a fall in real estate prices. This leads to fewer investments and constructions, leading to a slowdown in the industry.

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Inflation and Crypto 

Crypto, NFTs, and other inflation hedge assets behave similarly to Nasdaq derivatives and crash badly during a rise in interest rates. People tend to withdraw their money from such risky places and invest in safer options like bonds. This leads to a decline in their prices and startups valuations that borrow heavily and incur high expenses.

Inflation and Commodity Prices 

Commodities such as crude oil, natural gas, etc., experience a fall in their prices during rising interest rates. As industrial demand decreases, companies tend to use fewer resources, leading to a decrease in demand for commodities. Consumers tend to spend less on transportation, leading to lower demand for crude oil and natural gas.

Gold and silver prices, in general, have no direct relationship with rising interest rates. However, their prices may be indirectly impacted by the change in the value of the US dollar, which is impacted by interest rates.

Also Read: Small Towns That Will Soon Catch Up With Mumbai As Startup Hubs 

How Inflation Can Affect Startup Funding and Valuations?

Startups are highly dependent on funding, and as interest rates rise, the costs of borrowing increases, leading to lower spending by both consumers and VCs. This, in turn, leads to higher Startup losses and a crash in funding and valuation. Big VC's like Tiger Global, Softbank, etc., are significantly impacted as their portfolio value starts declining, leading to pressure to give returns to their LP's.

The rising interest rates have far-reaching impacts that affect every aspect of the economy. While they may be a necessary measure to control inflation, the trade-off is often a slowdown in economic growth and decreased spending. It is essential to keep a close watch on interest rates and their impact on different asset classes to make informed investment decisions. Businesses, especially Startups, should prepare for the consequences of rising interest rates and be proactive in their strategies to mitigate the negative effects on their operations.