Bank scrips wilt under rate heat

Bank stocks were the biggest losers on the street on Monday, falling nearly 6 per cent. The stocks have lost around 8 per cent since December 2006, when the Reserve Bank of India began to hike the cash reserve ratio to curb inflation by draining excess liquidity from the system.

Technology, capital goods and auto stocks too witnessed price erosion between 5 per cent and 12 per cent on fears that the interest rate hike would not only restrict growth in the banking sector, but also hamper prospects for key sectors.

Since December 11, 2006, the RBI has raised the cash reserve ratio (CRR) - the amount of cash that lenders must set aside against deposits - three times in an attempt to control inflation.

The Bombay Stock Exchange (BSE) Sensex has gone down by 7.04 per cent to 12,455.33 points from 13,399.43 points on 11 December. The BSE Bankex has lost 8.84 per cent to 6,152.59 points and the BSE IT has shed 8.18 per cent to 4,672.56 points.

BSE FMCG index has been hit badly during this period, going down by 14.24 per cent to 1,691.10 points, while the auto sector suffered on fears of a drop in sales with rates rising.

"As far as auto manufacturers are concerned, sales would be hit as the hike in interest rate means higher equated monthly installments for customers. Besides, during the last two three months, the entry level two-wheeler segment has seen a drop in growth. Stocks of auto component makers would also be affected as most are dependent on the performance of the domestic auto industry," Umesh Karne, auto consultant with Emkay Share and Stock Brokers Ltd said.

On December 11, the RBI announced a 50 basis point hike in the CRR to 5.50 per cent, following which Bankex lost 3.22 per cent to 6,531.95 points on the next trading day.

However, following the next two rounds of change, on January 31 and February 14, the index gained on expectations from the then upcoming Union Budget.

"The sharp rise in interest rates over the past 12 months has seen affordability reduce and could impact asset quality in the future," Ashutosh Narkar, banking analyst with India Infoline said in his daily note to clients.

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Markets will now consolidate
The market will consolidate at current levels. We are not bearish on the market. In the short term, the UP elections, monsoon and Q4 earnings will impact sentiment. I think, companies will report a strong set of numbers for the March quarter.

"" Motilal Oswal,
Chairman, Motilal Oswal Financial Services

Expect 4-5% correction
Investors, who want to come in with a one-year perspective over the next few days, can expect 20-22 per cent returns over the next 12 months. Owing to the rate hikes, there are growth concerns for the economy in the short-run. Markets could correct by another 4-5 per cent in the next few days. However, in my view, the tightening cycle is over now. As inflation starts falling, people will be more confident about market's prospects.

"" Sandip Sabharwal,
Chief Investment Officer (Equity), JM Financial Asset Management

Short-term volatility likely
There are some fundamental shifts happening, which are creating concerns for investors. However, the India growth story is still strong. Following the rate hike, real estate, construction, automobile sectors will be impacted. In the short term, markets will stay volatile.

"" Pankaj Razdan,
Managing Director, ICICI-Prudential Mutual Fund

Growth deceleration likely
I think we have entered a consolidation phase for the Indian markets. Capital appreciation has substantially outstripped economic growth over the last four years, helped by abundant and cheap funding. The tables are turning. Gravity defines does not mix well with tighter monetary policies. Given the transmission mechanism between the capital market and the economy, I would not be surprised if we experience a deceleration of growth rate this year.

"" Frederic Amoudru,
Chief Executive and Country Manager, BNP Paribas