Investment Shastra

How does the RBI interest rate hike affect your wallet?

On Friday, RBI raised Repo rates by 25 basis points or 0.25%. The RBI Governor has continued with a hawkish monetary policy given persistent high Inflation over the last two years. Inflation for August inched higher to 9.78% and RBI has made a clear choice of favouring Inflation control over losing some growth.

Slowdown pressures are building up in key segments of the Indian economy. As a result core IIP numbers (IIP numbers without Capital Goods Industry) have come in lower at 6.5%.

We believe that India’s Inflation is more supply side inflation, and the Governement. policy is a more robust tool for impacting Inflation than RBI’s Monetary Policy. Fiscal Policy, targeting investment in specific industries and faster rollout of Government infrastructure plans would have had beneficial impact. But Government inaction has forced RBI’s hand.

So, how does this interest rate hike affect your wallet?

This latest bout of Interest rate hike may lead to hike in EMI paid by the common man for housing and auto loan. As if rising inflation was not enough, increased EMI will force many families to rework their household budgets.

Interest Rate sensitive sectors like Bank, Auto, Real Estate will continue to be weak.

Banks would see their cost increasing marginally, this will impact Net Interest Margin (NIM) of Banks for the next quarter.

Automobile Companies which have reduced the output in August include Maruti Suzuki (-22 %), Tata Motors (-27 %), Honda Siel (-32 %), Fiat (-54 %) and Hindustan Motors (-54 %). Only, General Motors’ output was up by 0.58% and Hyundai increased it by 2%. The cut in output indicates that the companies are not too optimistic about the festive season and are not keen to pile up heavy inventories.

Real Estate companies continue to see weak sales and rising costs impacting their margins. But Residential housing prices in 12 cities have shown rise in prices in the quarter ended June, 2011 (Apr-Jun, 2011) over the previous quarter ended March, 2011 (Jan-Mar, 2011). This means that real estate companies are not decreasing prices to liquidate their inventory.

With 11 of 30 BSE SENSEX Stocks being Interest Rate Sensitive we believe the RBI’s action may have a negative impact on their business. It is best to stay away from these companies till RBI decides on giving economy a breather. Few of these companies are DLF, Bajaj Auto, Tata Motors, SBI.

To learn more about interest rate.

To learn more about Inflation click here.

To learn more about IIP click here.

Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions.

Team-MoneyWorks4me

2 comments

  • The RBI Governor’s decision to increase the Repo Rate by further 25 basis points in an effort to tame the inflation will not meet any success.On the contrary, it is hampering India’s overall industrial growth and large Corporates are now availing loans for expansion and working capital needs from Overseas Financial Institutions.This has had an adverse affect on the Indian Banks which are now looking at other alternate avenues to  grown their Loan Books.Secondly, with the increase in Rates(total 12 over the last one year),common man is now defaulting in paying EMIs for various loans(Home and Personal) availed from the Bank,thereby again increasing NPAs in the Indian Banking System.And we all know that inspite of the several increases in the Interest Rate by the RBI, Inflation continues to be in double figures, with food inflation hovering at around 10%.The purpose has been defeated and on the contrary, “India’s Growth Story”  of 7 – 8% has been dealt a deadly blow.IT IS HIGH TIME DR.MANMOHAN SINGH AND HIS TEAM OF ECONOMISTS TAKE SOME CONCRETE STEPS AND START THINKING OUT -OF – THE BOX.  

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