Interest rate-sensitive stocks bled after the Reserve Bank of India (RBI), in a surprise move, decided to increase its key policy rate.
The BSE realty sector index declined by 6.5 per cent, followed by the banking index, which fell 4.2 per cent. Stocks in these sectors fell as much as 12 per cent.
Analysts said the outlook towards rate-sensitive stocks turned bearish on concerns that the central bank might increase rates in future if inflation didn’t cool.
Realty and automobile stocks fell on worries that higher interest rates might impact demand as consumers defer buying. Realty was hit more, since higher interest rates could hit a majority of companies here, which have high debt on their balance sheet.
"The extra borrowing burden was not expected by the sector, especially when it is already under pressure due to existing debt,” said Jayant Manglik, president, retail distribution, Religare Securities.
Analysts said banking stocks came under pressure after bond yields hardened and concerns mounted on asset quality. Sachin Shah, fund manager, Emkay Investment Managers, said these stocks could remain under pressure till the currency and bond market conditions improved.
Analysts recommend investors be cautious while investing in rate-sensitive stocks, especially in realty companies with high debt and banking names where non-performing assets could balloon.
“One should be cautiously optimistic. The corporate earnings numbers are likely to be dull for these sectors,” said Shah.
“Investors at this point should be cautious. But the markets have been moving up for some time, which means investors could hold back on investments for the time being,” said Niraj Kumar, head of equity investments, Aviva Life Insurance.