After the Reserve Bank of India raised the repo rate — the rate at which RBI lends to banks — by 50 basis points to 5.40 percent, shares of auto companies and banks kept their gains or continued to rise. This comes after a 90 basis point increase by the central bank in May and June this year to address rising inflation.
The street has priced in a rate increase between 35-50 basis points.
“The decisions of the Monetary Policy Committee (MPC) were in line with our expectations. Given the growing imbalances in the external sector and the global uncertainties, rapid action was necessary. We continue to see a 5.75 percent repo rate by December 2022,” said Upasna Bhardwaj, chief economist of Kotak Mahindra Bank.
ICICI Bank climbed 1.5 percent, IDFC First Bank 1.4 percent, SBI 1 percent and Axis Bank 0.78 percent. Nifty Bank rose 0.72 percent.
“We expect the markets to stabilize after the initial reaction. Overall, we remain positive on the banking sector and are constructive on the equity markets, given our strong belief that the Indian economy will rebound for more than a year,” said Jaideep Arora, CEO of Sharekhan by BNP Paribas.
Naveen Kulkarni, Chief Investment Officer, Axis Securities, said: “We have seen systemic liquidity tighten since RBI began withdrawing excess liquidity, and systemic credit growth improved to 14 percent. With credit growth accelerating, we believe the banks with a higher proportion of floating interest rates and a robust CASA-led deposit franchise should be well placed in this rising interest rate environment.”
Nifty Auto declined marginally, largely due to sales in auto parts manufacturers Balkrishna Industries and Sona Comstar. TVS Motor, M&M, Escorts and Bharat Forge traded green.
Nifty Realty, which is also interest rate sensitive, rose 0.41 percent. Shares of Macrotech Developers, Sobha, DLF, Godrej Properties and Oberoi Realty rose to 1.5 percent.
“The 50 basis point increase is definitely on the higher side, and mortgage interest rates will now move further into the red zone,” said Anuj Puri, President of ANAROCK Group. “This blow comes along with inflationary trends of primary commodities, including cement, steel, labor, etc., which have recently led to a surge in property prices. Together, these factors will affect home sales.”
Shishir Baijal, chairman and chief executive of Knight Frank India, said that with the cumulative rate hike to date, assuming full transfer, the affordability of potential home buyers is shrinking by about 11 percent.
This means that a buyer who could have paid Rs 1 crore on the house before the RBI started raising rates can now afford a house worth Rs 89 lakh. This places the responsibility on real estate companies to take action. “Developers are expected to take mitigating measures to soften the blow to home buyers’ affordability,” Baijal said.
Despite these concerns, Nifty Real Estate continued to rise on August 5. Indiabulls Real Estate, Lodha and Sobha were the biggest winners.
Sensex was trading higher by 121.16 points or 0.21 percent at 58,419.96, and the Nifty added 28.50 points or 0.16 percent at 17,410.50.
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