Rate-sensitive sectors to gain after RBI cuts repo rate by 25 basis points

At a time when the Street is worried about the below-normal monsoon prediction by Skymet, as well as slower growth in India and global economies, the Reserve Bank of India’s (RBI’s) monetary policy provides relief, mainly to rate-sensitive sectors such as auto, realty and non-banking financial companies (NBFCs). 

With some experts expecting more rate cuts going ahead, it could further help these sectors and enhance economic growth.

Slowdown in public and private consumption has weighed on India’s growth. The RBI, too, lowered its gross domestic product (GDP) forecast for FY20 to 7.2 per cent from 7.4 per cent. 

Sandip Raichura, head of retail at Prabhudas Lilladher, says: “Inflationary trend in India is likely to remain benign till 

October 2019. Besides, the global situation of slowdown in growth and stable interest rates give no reason for the RBI to increase rates or keep them unchanged, going ahead.”

While some upside risk to inflation cannot be ruled out, given the below-normal monsoon expectations and El Nino (which indicates complex climatic conditions), experts do not see much impact for now.

“A 5-10 per cent shortfall in rainfall is unlikely to push up inflation significantly. However, interest rate cuts will improve consumption and growth,” says G Chokkalingam, founder and managing director of Equinomics Research & Advisory.

But what has enthused investors more is the RBI’s efforts to enhance liquidity to support lending by banks. Consequently, the stocks of major players among rate-sensitive sectors, such as housing finance, automobiles and realty, among others, were up 1-3 per cent on Thursday, even as the Sensex was down about half a per cent.

Amid dismal deposit growth, banks have not been able to pass on benefits of the earlier rate cuts to borrowers, impacting economic growth. 

Besides showing its intentions to use various mechanisms to push liquidity, such as open market operations or foreign exchange swap as and when required, the RBI on Thursday also allowed banks to use an additional 2 per cent of the investments made in government securities under the SLR framework for meeting regulatory requirements of liquidity coverage ratio. 

Experts estimate the latest move to release liquidity worth over Rs 2 trillion into the system. 

The RBI also said that an effective mechanism for transmission of rate cuts would be put in place. All this should enable banks to lend at lower rates.

Further, Chokkalingam believes that the global situation of weak inflation and growth, and rate cuts, are signs of deflation that are likely to benefit India if oil prices fall as experienced in 2016. 

Overall, experts expect rate-sensitive stocks with better capital adequacy to benefit.