NEW DELHI: The domestic stock market might like the new avatar of Urjit Patel as dovish RBI Governor. The jittery market breathed a sigh of relief after the Reserve Bank of India (RBI) slashed policy rates by 25 bps to 6.25 per cent and indicated that inflation will cool off in the subsequent quarters.
Further cooling off in inflation will provide room to the central bank to cut rates further, which would be important to drive growth in the rate-sensitive sectors such as consumer durables, consumption, real estate as well as banking.
Apart from that, companies that are highly leveraged would reap the benefit of a fall in lending rates. Most of the infrastructure players as well as real estate companies should be on investors’ radar.
Banks are likely to pass on the interest rate cut to consumers ahead of Diwali in order to boost consumption, drive growth and kickstart investment cycle. ICICI BankBSE -0.79 % has already slashed its marginal cost of funds-based lending rate (MCLR) by 5 basis points effective from October 1.
In his maiden policy, new RBI Governor Urjit Patel did what the doctor has just ordered, slashed repo rate by 25 bps. The RBI Governor seems to have favoured the growth argument over inflation fight.
However, the important takeaway from the RBI Governor’s speech is his dovish stance on future rate cuts as he expects inflation to fall and come below RBI’s comfort level.
“A rate cut coupled with a dovish stance would lead to outperformance by the highly indebted companies. It would also trigger fresh optimism in the automobile space, especially the two-wheeler sector is likely to continue the good show,” Vinit Pagaria, Senior Vice President – Investment Strategies at MicrosecBSE 2.11 % Capital, told ETMarkets.com.
“Real estate stocks would benefit considerably, as it would help reduce interest costs and help improve sluggish demand. However, PSU banks might see profit booking after the event and hence should better be avoided for short-term trading,” he said.
The decision of the monetary policy committee (MPC) was consistent with an accommodative stance of money policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by the fourth quarter of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth.
The growth momentum is expected to quicken with a normal monsoon raising agricultural growth and rural demand, and the stimulus to the urban consumption from the Pay Panel award, the RBI note said.
The accommodative stance of the monetary policy and comfortable liquidity conditions should support a revival in credit to the productive sectors. But defensive stocks could take a hit, experts said.
Tushar Pendharkar, Head of Research at Right Horizons Investment Advisory Services, told ETMarkets that if investors have a portfolio full of defensive stocks, it could underperform in the short term.
“However, portfolios with stocks that have direct or indirect links with infrastructure or retail lending are likely to perform better. Though defensive stocks could provide downside protection to a portfolio, a mix of both defensives and high-beta infrastructure stocks could do well,” he said.
Based on the views of various analysts, here is how the RBI policy is going to impact various sectors:
Banking: The banking space will be the first one to reap the benefits of a rate cut by RBI as it would bring down their cost of funds. It will be positive for both private as well as public sector banks in general.
“We believe the rate cut would be positive for all banks. But we like SBI and BoB, in particular. A cut in repo rate is positive for bond yields, which could result in treasury profits or reversal of mark-to-market (MTM) losses on the PSU banks’ bond portfolios,” Pankaj Karde, Senior VP & Head of Institutional Sales Research at Systematix Shares & Stocks, told ETMarkets.com.
“Both SBI and BoB have relatively better management profiles, low-cost deposit franchises and capital adequacy with respect to their peers,” he said.
Auto: The rate cut will result in lower lending rates, which could boost demand for the auto sector, especially two-wheeler makers ahead of festival season.
Infrastructure & power sectors: The infrastructure and power sectors are the ones that can reap the benefits of a drop in interest rates, because most the companies in this sector are debt laden and require massive fund infusion at regular intervals.
“The impact of rate cut will be positive as the market is likely to take rate cut as a positive signal. His will also result in reduction interest costs for companies and an the overall reduction in capital costs for companies,” Siddhartha Khemka, Head of Equity Research (Wealth) at CentrumBSE 2.43 % Broking, told ETMarkets.com.
“Lower interest rate is also likely to boost growth going forward for the overall economy and more specifically, will be beneficial for investment-related sectors like infrastructure, power, and capital goods,” he said.