Rate sensitives weather worst of equity rout with over 2-4% cuts

By: | Published: June 3, 2015 1:33 AM

Interest rate sensitive stocks and sectors indirectly dependent on lending rates witnessed selling pressure as the Reserve Bank of India...

Interest rate sensitive stocks and sectors indirectly dependent on lending rates witnessed selling pressure as the Reserve Bank of India (RBI) signalled a long pause to future rate cuts even as it reduced repo rate by 25 basis points (bps) on Tuesday.

RBI governor Raghuram Rajan had adopted a hawkish tone in his policy commentary, citing an upward revision in the central bank’s near-term inflation projections, marginal reduction in FY16 economic growth forecast, rising crude oil prices, and external risks. Rajan also highlighted PSU banks’ bad loan problem and called for greater capital infusion into state-owned banks.

“We feel policy rates are now neutral. Although the RBI has left the door open to further easing in the event of further disinflation, we expect it stay on a prolonged pause (until end-2016) as we believe that growth is in the initial stages of a business cycle recovery, inflation appears to be stabilising around 5.0-5.5% and inflation expectations are still elevated,” Nomura said in an investor note.

The gauge of banking stocks fell 3.5% to its lowest in three weeks led by sharp cuts in public sector banks. State Bank of India (SBI) lost 4.3% while Bank of Baroda and Bank of India lost more than 3% each. Canara Bank was top loser with 4.7% losses.

Experts said the Street was expecting a 50-bps cut in benchmark rates and Tuesday’s sell was largely profit booking to last Friday’s rally that had also priced in a 25-bps cut.

Rashesh Shah, chairman and CEO, Edelweiss Group said that revival in public investment is critical to boost demand. Equity market will remain rangebound and will be driven by earnings growth.

“RBI’s stance was more or less on expected line, although we were hoping for a 50 bps rate cut. The central bank expects inflation to inch higher, and has downgraded its growth forecast – not a very good sign of things to come. In this regard monsoon becomes extremely important, and government may need to take steps to ensure that food inflation does not rise even if the monsoon fails,” Shah said.

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The BSE Realty index declined 3% and the gauge of auto stocks fell nearly 2%. Other sectors allied to interest rates such as power, capital goods, and metals fell 1-1.5%.

Hero MotoCorp declined 3.76% while Bajaj Auto lost 2.88%. M&M share fell 2.56%. Real estate companies like DLF and HDIL lost 4.2% each. Shares of mining and metal company, Hindalco lost almost 4% while Tata Steel shares fell 2.29%.

Dhananjay Sinha, head of research, economist & strategist, Emkay Global Financial Services said rate cyclical stocks will exhibit volatility in the near term. “The 25 bps easing had already been priced into the market. However, the scaling-up of inflation projection and downward revision for real GDP growth projection has clearly dissipated the hopes for sustained softening in the interest rate cycle,” Sinha said.

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