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How increasing rate hikes by RBI may impact investors in banks, realty and auto stocks

NEW DELHI: After the Reserve Bank of India (RBI) increased its repo rate by 50 basis points last Friday, the total rate hike since May is now that of 190 bps. While a rising interest rate scenario is considered to be margin accretive for banks, increasing EMIs may impact demand in sectors like auto and realty.

Nifty Bank has been a clear outperformer so far in 2022 with a rally of nearly 9% as against a 1.5% decline in the headline index Nifty. While auto stocks have been rallying on the back of strong demand, the realty index has lost over 12% this year.

Bank stocks
Analysts have maintained a positive outlook on the BFSI sector as they expect sustenance of credit growth in double-digits with improving profitability on account of benign asset quality.

“Generally, the rising rates cycle is positive for lenders as rates are passed faster on loans than deposits and there is scope for improvement in NIMs,” said Narendra Solanki, Head of Equity Research, Anand Rathi Shares & Stock Brokers.

The rising interest rates will also help banks to reward depositors as banks will be able to draw more money into the system and lessen their

on external borrowing sources. “This is positive as credit growth is at a 9-year high of 16.2%. Low-interest rate lagged deposit growth. Banks have been straining to generate funds to meet the rising credit demand,” points out Vinod Nair, Head of Research at .

Realty and auto stocks

Conventional wisdom says as EMIs go up, demand for passenger vehicles and housing decreases. “It is a paradoxical moment for us. There has been a complete shift in the minds of consumers whose spending habits are not the same as in the 80s. The disposable income is going up and people don’t mind paying more,” said equity strategist Kranthi Bathini of Wealth Mills Securities.

He is of the opinion that demand is strong enough to let rate hike pressure impact realty and auto stocks.

Residential sales increased by around 50% during the first half of the calendar year.

“Considering the ongoing festive season and high market demand, we expect the trend to continue in the coming quarters. Despite the rate hike, the average home loan rate is still lower than it was 5–6 years ago,” Nair said.

He said the PV segment may not be impacted much in the short-term by the rate hike because of a pending order book of 7 lakh, but the move is likely to be detrimental to the price-sensitive entry-level two-wheeler segment.

However, he said, if interest rates are gradually hiked it will start to affect the total demand of the auto and realty sectors in 2023-24. It will start to affect the performance of the sector which is trading at premium valuation, he added.

He has a buy-on-dip strategy in both sectors.

has been among the top performers in the auto sector with a 65% rally. , M&M and have been other top gainers.

Capex theme

As borrowing becomes increasingly costlier for corporates, will the massive capex plan of India Inc get impacted?

Bathini said it is unlikely to hit existing capex plans where term sheets have been signed with banks. “Corporates also have the option to raise money through equity,” he said.

Most of the current capex is structural in nature, triggered by ongoing reforms focusing on transforming India as a manufacturing hub. “Strong FDI inflows are noticed which is likely to be welcomed in the future. New business opportunities are generated post the pandemic with China +1 and Europe + 1, which are long-term structural changes, not to be reversed unless there is a change in policy,” Geojit’s Nair said.

Analysts, however, admit that the constant rise in costs will start to have a gradual effect in the next 1-2 years.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



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