Rate hikes make equities riskier

Oct 07 2013, 10:04 IST
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SummaryMarkets have been fickle in recent weeks, even risk-aware investors will have to be cautious about the stocks they pick

front which forces the markets to change direction, adventurous investors can start taking positions again. But overall it does make the stock market a less interesting place to invest.

Of course, even risk-aware investors will have to be cautious about the stocks they pick because the latest comments from the central bank could mean short-term stock market oblivion for debt-ridden companies, the banking sector and the overall earnings outlook for

India Inc. Specifically autos, home and personal loans are most likely to go up due to this sudden and unexpected change in direction. The increase in the key lending rates has dented some of the bullishness which accompanied the new RBI governor’s installation and the message is clear—he is as keen to control inflation as he is to support growth. The hike in repo rate will increase finance cost and adversely hit housing demand during the critical festive season when the sector sees a significant percentage of its sales. This will be yet another challenge for the realty sector which is already saddled with huge debt, shrinking margins and consequently low share prices.

On the plus side, the Marginal Standing Facility (MSF) rate cut is a welcome change for banks as it reduces their cost of funding and they can actually increase credit availability. This is the rate at which banks borrow from the RBI to meet their CRR and SLR requirements and will augment liquidity in the banking system. But this is offset by the increase in interest rates which will affect demand and lead to reduced consumption and therefore stressed balance sheets of companies. The most immediate effect is likely to be seen during the upcoming Dussehra and Diwali festive season and could be the earliest indicator yet of how the Q3 earnings of certain sectors will fare. However, the consequent reduced inflation will lead to a strengthening rupee which will make imports cheaper. The recent stability in crude oil prices lessen our worries on the CAD deficit front to some extent and will help preserve our foreign exchange reserves. Constricting liquidity will also regulate money supply to some extent and reduce exchange rate volatility.

Equity markets have been fickle in the recent weeks and remain tricky yet. So for everybody, especially retail investors, caution is necessary this quarter. As someone said, it is a good thing to learn caution from the misadventures of others. Of course, there are several factors

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