Rise in repo fails to dampen allure for rate-sensitive stocks

Mumbai: The Reserve Bank of India's interest rate hike for the second straight month has not dampened investors' appetite for shares of companies sensitive to interest rate moves such as banks, real estate and automobiles.

But, analysts warn that further rate increases could result in fewer stocks remaining attractive as investors assess the impact of higher interest rates on demand.

Analysts are positive on residential developers in the real estate space and autos, but are less optimistic about the lenders. Mahindra & Mahindra, Maruti Suzuki India, Exide Industries and Oberoi Realty are seen as more attractive bets at this juncture.


"The way ahead for rate sensitives would depend on the extent of rate increases. I assume we will see another 60-85 bps (hike) based on our inflation forecasts," said Sanjeev Prasad, co-head, Kotak Institutional Equities. "I don't think 150-175 bps of rate increases will lead to major demand destruction. However, if the RBI was to raise rates more linked to higher-than-expected inflation, then we would see challenges for demand," said Prasad.

The BSE Realty index ended up 0.28% at 3,227.36 on Thursday and the Auto index gained 0.27% at 26,015.04, a day after the RBI increased a key policy rate by 50 basis points. In May, the central bank had raised the rate by 40 basis points.

Hemang Jani, head of equity strategy-broking and distribution at Motilal Oswal, said RBI rate hike was an event risk which has been factored in, so the rate hike itself is not a negative development for rate sensitive stocks.

The Realty index is down 12% from April but the Auto index is up 8% since April. The Bank Nifty gained 0.4% to close at 35,085.45.

Siddarth Bhamre, research head at Religare Securities, finds auto and real estate stocks a more attractive proposition than banks.

"After a 50-bps hike, we have not seen a major fall in auto or banking names. Within rate sensitives, the auto sector is well poised, the index is 5-6% away from all-time highs with technical chart breakouts and formation of bullish positions," said Bhamre.

"The correlation that rate sensitives should fall on rate hikes does not work every time," he added. Bhamre does not prefer banks as much as this interest rate increase is not because of growth but supply side factors.