RBI’s Rate Rub Weightier This Time
MUMBAI: DALAL Street had readied itself for a light blow, but what the RBI governor delivered was almost a knockout. One so hard that it could take the bulls sometime to find their feet again. Shares in rate-sensitive sectors like banking, automobile and real estate fell, as higher interest rates are expected to hurt demand for credit and consequently, products bought on borrowed money.
While these sectors may be the immediate casualties, tight liquidity is expected to gradually slow demand in others as well, as many companies will be forced to either scale down or put off expansion plans due to higher borrowing costs.
Reflecting these concerns, the 30-share Sensex ended Tuesday at 13,791.54, down 557.57 points, or 4%, over the previous close. The 50-share Nifty, meanwhile, closed at 4,189.85, down 142.25 points, or 3%, over the previous close.
Maruti, ICICI Bank, HDFC Bank, Tata Motors and L&T were among the worst performers, shedding 6-9%. In addition to the higher-than-expected hike in benchmark rates,
weakness in global markets too weighed down sentiment. Key Asian markets ended 1-2% lower on Tuesday.
“This (the rate hikes) is much worse than what the market was expecting; this will slow the tempo of investment and demand,” says India Infoline chairman and managing director Nirmal Jain. He expects the market to remain weak for sometime, unless there is a steep fall in crude oil prices. “Oil is still the key; if there is a $15-20 (per barrel) drop, sentiment may improve. Else, any recovery will be led by short covering and not genuine purchases,” says Mr Jain.
Investor confidence takes a beating
Market watchers agree that the latest measures will help cool inflation, but caution it could also pave the way for more earnings downgrades in the near term and further undermine investor confidence. “It is not a very gloomy picture, the market will consolidate around these levels,” says Edelweiss Capital CMD Rashesh Shah, adding that some bold reforms by the government was crucial to perk up sentiment.
As per BSE provisional data, foreign funds net sold shares worth Rs 538 crore while local mutual funds accounted for net outflows of Rs 254 crore. “Market will remain weak for sometime; it may not plunge, but a recovery is some way off,” says Birla Sunlife AMC CIO A Balasubramaniam.
Of the three rate-sensitive sectors that bore the brunt of Tuesday’s selloff, outlook on the banking sector is mixed while that on auto and realty remains bearish. The BSE Bankex fell 8.3% to close at 6,199.60 on Tuesday. But over the last one month, it has risen 1.2%. “Outlook for banks is not all that bleak,” says Mr Balasubramaniam, “they can protect their margins by hiking lending rates and lowering deposit rates. Valuations of banks are not an issue; most of them are available at less than the one-time book (value) or less.”
But he cautions that investors buying these shares will have to be patient. “When the market as a whole is not doing well, one can’t expect the bank shares to deliver spectacular returns,” he says.
And on Tuesday, the BSE Realty index and BSE Auto Index fell over 5% and 4% respectively, and are down 1.6% and 3% over the last one month. But market watchers think both sectors—especially real estate—are not in a position to pass on higher costs to customers as demand has softened significantly in recent months.
“Valuations may appear dirt cheap, but I would still caution against investing in rate-sensitive sectors at this stage,” says Mr Balasubramaniam, who thinks that IT, pharma and FMCG stocks could be better bets. An added trigger for banking stocks could be the much-promised reforms in the sector. Still, some brokerage houses are advising caution.
