After the Reserve Bank of India hiked the repo rate – the rate at which RBI lends to banks – by 50 basis points to 5.40 per cent, shares of auto companies and banks either maintained their gains or climbed further. This comes after a 90 basis point hike by the central bank in May and June this year to tackle rising inflation.
The street has been pricing in a rate hike between 35-50 basis points.
“The monetary policy committee (MPC) decisions have been in line with our expectations. Given the increasing external sector imbalances and global uncertainties, the need for frontloaded action was imperative. We continue to see a 5.75 per cent repo rate by Dec 2022,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.
“We expect markets to stabilise post the initial reaction. Overall, we remain positive on the banking sector and are constructive on the equity markets given our strong conviction on a multi-year upcycle in the Indian economy,” said Jaideep Arora, CEO, Sharekhan by BNP Paribas.
Naveen Kulkarni, Chief Investment Officer, Axis Securities, said: “We have seen system liquidity tighten since RBI started withdrawing excess liquidity, and system credit growth improved to 14 per cent. With credit growth looking up, we believe the banks with a higher share of floating rates and a robust CASA-led deposit franchise should be placed well in this increasing interest rate environment.”
Nifty Auto was down marginally largely due to selling in auto component makers Balkrishna Industries and Sona Comstar. TVS Motor, M&M, Escorts, and Bharat Forge traded in the green.
Nifty Realty, which is also sensitive to interest rates, rose 0.41 per cent. Shares of Macrotech Developers, Sobha, DLF, Godrej Properties and Oberoi Realty advanced up to 1.5 per cent.
“The hike by 50 bps is definitely on the higher side, and home loan lending rates will now edge further into the red zone,” said Anuj Puri, Chairman of ANAROCK Group. “This whammy comes along with the inflationary trends of primary raw materials, including cement, steel, labour, etc., that have recently led to a rise in property prices. Together, these factors will impact residential sales.”
Shishir Baijal, chairman and managing director, Knight Frank India, said with the cumulative rate hike until today, assuming complete transmission, prospective home buyers’ affordability shrinks by around 11 per cent.
This means a buyer who could have afforded Rs 1 crore worth of house before the RBI started raising rates can now afford a house worth Rs 89 lakh only. This puts the onus on real estate companies to take action. “Developers are expected to undertake mitigating measures to soften the blow on homebuyer affordability,” said Baijal.
Despite these concerns, Nifty Real Estate continued to rise on August 5. Indiabulls Real Estate, Lodha, and Sobha were the biggest gainers.
Sensex was trading higher by 121.16 points or 0.21 per cent at 58,419.96, and the Nifty added 28.50 points or 0.16 per cent at 17,410.50.