Cloud over further cuts hurts interest rate-sensitive stocks

Rate-sensitive stocks came under heavy selling pressure on Tuesday as Reserve Bank of India cuts repo rate

Stocks of interest rate-sensitive sectors like banking, automobiles and real estate came under heavy selling pressure on Tuesday.

This was in the wake of the cautious stance adopted by the Reserve Bank of India (RBI) over further monetary policy easing and fear of drought. These stocks had earlier been gaining, in anticipation of a favorable outcome from the RBI review.

Their respective sectoral indices were down by two to four per cent on Tuesday, despite RBI cutting its key policy rate by 25 basis points (bps). The central bank’s downplaying the possibility of further cuts did not go down well with investors.

“Expectations have taken a bit of a hit. RBI’s muted outlook on rate cuts has disappointed the markets,” said Pankaj Pandey, head of research, ICICI Securities.

Within the banking space, state-owned lenders were worst-hit. Union Bank of India, Allahabad Bank and Oriental Bank of Commerce each fell about seven per cent. “In some of these banks, asset quality concerns still persist and, going forward, there will be more of a range-bound movement in these stocks,” said Pandey.

“The downward revision of monsoon (rain forecast) is a major concern because it would negatively impact rural growth and demand. If rural growth falls, it will impact all sectors, especially consumption-driven ones like automobiles,” said Alex Mathew, head of research, Geojit BNP Paribas Financial Sevices.

However, analysts expect to see some turnaround in the second half of the financial year, when economic recovery is expected to get a boost.

“As of now, the consumer-driven sectors have benefited from the improvement in sentiment. We are expecting  that once things improve in the second half, the capex-driven sectors like real estate and infrastructure will also start improving,” said Pandey.

Analysts said banking stocks are unlikely to see any further declines. However, the automobile sector could be in for more pain, as the monthly sales data, while better than a year before, are still not expected to show significant increases. The real estate sector is expected to continue being a laggard.

The auto index had risen about four per cent in the past one month in anticipation of a rate cut and easing of RBI’s stance on monetary policy. The banking index was up about 2.2 per cent.