RBI decisions to hike two key policy rates are expected to affect stocks of companies from sectors like banking & financial services, and real estate more than any other sector since these sectors are more vulnerable to higher interest rates than others . However, given that most stocks from these sectors are already badly hammered since their January highs, market players do not see much downside from current levels.
Market players said with RBI’s more hawkish view to rein in inflation by tightening the supply of money, interest rates are expected to go up. In a higher interest rate scenario people borrow less from banks and other lenders and these companies face a tough time. In a higher interest rate scenario, banks also have to make higher provisions for their losses in their bonds portfolio which are marked-to market . A note from Religare Securities said that banks like Union Bank of India, Allahabad Bank, Indian Bank would be the most impacted on this account.
Higher interest rates also lead to higher home loan rates that in turn lead to people deferring their home buying and a drop in demand for homes. However, there are silver linings to the auto sector stocks. Market players said when interest rates go up, people initially show some resistance to buying two wheelers and passenger cars, but demand again picks up with a lag of two-to-four months. The scenario for the real estate sector is slightly different since other than rising interest, the slowdown in the sector is also because of over supply. Ambareesh Baliga, VP, Karvy Stockbroking said, “This sector is suffering more because of excesses in the sector, and not much because of rising interest rate”. Baliga added, ” There has also been excessive speculation in the sector during the past few years and now it’s cooling off”.
