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.
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