The Bombay Stock Exchange's Bankex fell by 5.7 per cent per cent in just three trading days, while the 30-share benchmark Sensex declined by 2.2 per cent. No wonder then that the interest-sensitive sectors were also hammered on the bourses, with realty and auto stocks losing over 4 per cent each.
The hikes have been severe on interest-sensitive sectors such as banking (SBI, ICICI Bank, HDFC Bank, Kotak Mahindra Bank and Punjab National Bank), realty (DLF, Unitech, Indiabulls Real Estate, Omaxe and HDIL), automobile (Tata Motors, Mahindra & Mahindra, Maruti Suzuki, LML and TVS Motor) and construction (HCC, Nagarjuna Constructions, Punj Lloyd and Gammon India). Most of the these scrips closed at their 52-week lows last week on BSE.
On the derivatives markets, almost all stocks futures traded on the National Stock Exchange either created fresh short positions or unwinding of long positions on June 27. Among banking stocks, ICICI Bank, SBI, IndusInd Bank, Kotak Mahindra Bank added fresh shorts, while Allahabad Bank and Syndicate Bank witnessed unwinding of long positions.
According to a banking sector analyst at Morgan Stanley, the rise in the repo and CRR rate will hit the banking sector very hard going forward. He estimated 25-30 per cent downside potential for banks stocks even though they have corrected by more than 30 per cent y-o-y till date.
According to analysts, banks' earnings will be hit by slower volume growth, weaker net interest margins and deterioration in credit quality. So far general banks have not touched lending rates except for 2-3 banks. Other banks will probably raise rates by 50-75 basis points in the next few days.
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However, even that is unlikely to compensate for the higher reserves (yield on reserves is zero) and the higher repo rates (which increases incremental funding cost). Hence, net interest margins will come off.
Moreover, the increase in lending rates will likely take loan growth down to mid-teens from 23-24 per cent currently. More importantly, asset quality, already showing signs of stress, will be nudged even lower.
The hike in rates will impact individuals and as well as corporate profitability, which will probably cause further deterioration in asset quality.