Rate-sensitive stocks rally, but worries stay

MUMBAI: Indian stock markets reversed losses of more than 1% seen earlier in the session to end Tuesday on a higher note, after the Reserve Bank of India surprised the Street with a higher-than-expected 50 basis points rate cut. Shares of rate-sensitive sectors, such as banking, automobiles, consumer durables and real estate, rallied on short covering, but the cloud has not lifted over global markets with a few imponderables, including redemption pressure in emerging markets, still causing a few worries.

Shares of housing finance companies rallied the most after the central bank proposed to cut risk weights for individual housing loans — the move is expected to nudge finance companies to lend more lowvalue housing loans with existing capital, while boosting profitability. HDFC gained 3.5%, LIC Housing Finance surged 6.3%, while Bajaj Finance and Shriram Transport rallied about 6% each on Tuesday. Declining interest rates are also expected to revive demand in the automobile sector as fence-sitters may decide to buy new cars or upgrade their models with restructured loans. Maruti Suzuki surged 3.2% while M&M gained 1.5%. Traders are pinning their hopes on the automobile sector to deliver good sales during the festive season, especially at a time when fuel prices are low.

“Rate-sensitive sectors like banking and financial services, automobiles, capital goods and construction companies are seen as likely beneficiaries, but in the interim, markets may remain uncertain due to a volatile global environment,” said Vikas Khemani, CEO at Edelweiss Securities. “Investors with a three-year view may look at rate-sensitive sectors for good returns.” Select banking stocks such as HDFC Bank rose 1.7%, SBI gained 1%, but analysts remained sceptical about this space as it stares at non-performing assets of metals and mining companies amid global economic slowdown. The banking sector is already struggling with bad loans of existing power and infrastructure companies. “The 50 bps cut will have a rub-off impact on automobile, consumer durable and cement companies,” said Pankaj Pandey, head of research, ICICIdirect.com.

Lower interest rates are likely to revive demand for properties — residential and commercial — but this will take time with the economy showing no signs of revving up. Housing Development & Infrastructure (HDIL) surged 8.8%, while Indiabulls Real Estate and DLF gained 3.6% each. Capital goods companies such as L&T also rose 1.2% and BHEL advanced 1.1%.