Basically the stock market tends to decline on news of rate increases.

When a country raises the interest rate for its currency, we would expect that currency to gain in value relative to other currencies. This is because an increase in a currency’s interest rate makes it more valuable to hold as an investment, due to the higher rates that banks pay on deposits, borrowers pay on bonds/loans, etc. When the currency becomes more valuable, demand for it should increase, and so its value (price) should go up.

Most of the business investments are funded wholly or partially by credit. As a result, it becomes more expensive for businesses to lend money as they will have to pay back more money.

A company has to work harder in a high interest environment to generate higher returns. In general, businesses tend to invest less when interest rates increase, because the cost of borrowing money increases.

Therefore they are likely to cut back on investment and put any of their spare money into banks as the increase in interest rates will mean they will receive more if they put it into an account. Moreover, an increase in interest rates means that companies often have to devote more resources to paying interest on their existing debts, which lowers the amount available for investment. As a result of interest rates go up, there are some potential projects that are no longer profitable. Hence these projects will not go ahead, and investment falls. Lower investment equals lower potential growth for businesses in the near future.

In the case of investor, when interest rate go up, it may be more attractive to earn interest from the bank — it is more risky to hold stocks than to have money in the bank. As such, an increase in interest rates affects investment adversely as interest is a cost to investor. As such if PER is high and the interest rate is high, it may signal time to exit the market.