Former Goldman Sachs executive and macroeconomic expert Raoul Pal has raised an interesting argument about how Indian growth tech companies are expanding significantly in a higher interest rate environment as compared to the U.S.
There is a puzzle in trying to figure out. Many people say that growth tech can’t grow without low rates but I look across at India with 7.5% rates and growth tech is growing like crazy and with high valuations. 4% US rates is hardly a hurdle for a fast growing sector…
— Raoul Pal (@RaoulGMI) October 11, 2022
“There is a puzzle in trying to figure out. Many people say that growth tech can’t grow without low rates, but I look across at India with 7.5% rates and growth tech is growing like crazy and with high valuations. 4% U.S. rates is hardly a hurdle for a fast-growing sector,” Pal tweeted.
Rate Differential: Pal’s argument points towards the interest rate differential between the two countries and the general belief that prolonged lower interest rates aid in fuelling growth at tech companies.
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The interest rate differential between India and the U.S. currently stands at over 2.5% if the policy rates are taken into account. However, when it comes to on-ground lending, the differential could be way higher, taking into account the huge spreads that Indian banks charge their customers, especially to companies that are just growing.
However, if one was to believe that the growth of tech companies is inversely proportional to the prevailing interest rates, then the firms that grew in the 70s and 80s when the Fed aggressively hiked interest rates to counter inflation present interesting case studies.
Pal cited the example of IBM (NYSE: IBM) and Xerox Holdings Corp (NASDAQ: XRX), which witnessed their growth periods when the Fed funds rate was consistently over the 7% mark.
“Remember IBM and Xerox in the '70s and ’80s. I think rates are a red herring and I think rates go lower anyway,” he tweeted.
Another interesting American company is PayPal Holdings Inc (NASDAQ: PYPL), which was founded in the year 1998. Since its founding 24 years ago, the company has become a behemoth with a market capitalization of close to $98 billion.
As in India’s case, digital payments and financial services company Paytm, which was founded in the year 2010, when the policy rate in India was close to 5%, has currently grown to a valuation of close to $5.75 billion.
This is interesting because interest rates were on an upward path till 2014 in India when the policy rate touched its peak at 8%. Similarly, the food delivery app Zomato which was founded in 2008, is currently boasting a valuation of over $7 billion.
Demographics: One Twitter user pointed out India’s demographics could be a reason. Pal acknowledged the discussions but asserted that margins are similar globally and so are tech growth rates.
“Lots of interesting replies that India is different because of costs or demographics but the truth is margins are similar globally and tech growth rates are the same globally. Lots of inconsistencies here,” he said.
