Realty, auto, bank stocks tumble after RBI's rate hike as experts predict quick actions against inflation

The 30-share BSE benchmark Sensex tumbled 1,306.96 points or 2.29 per cent to settle at 55,669.03. During the day, it plummeted 1,474.39 points or 2.58 per cent to 55,501.60.
Image used for representational purpose. (File | Reuters)
Image used for representational purpose. (File | Reuters)

NEW DELHI: Interest rate-sensitive realty, auto and bank stocks on Wednesday fell sharply after the Reserve Bank hiked its key interest rate by 40 basis points (bps) in an unexpected move to tame rising inflation.

From the realty pack, DLF tanked 5.28 per cent, Indiabulls Real Estate declined 5.05 per cent, Sunteck Realty went lower by 4.61 per cent, Godrej Properties fell 4.33 per cent, Sobha (3.82 per cent), Oberoi Realty (3.37 per cent) and Brigade Enterprises (2.24 per cent) on the BSE.

The BSE realty index declined by 3.31 per cent to 3,418.45.

Among auto counters, Ashok Leyland plunged 4.44 per cent, Bajaj Auto tanked 3.54 per cent, TVS Motor (3.31 per cent), Maruti (3.17 per cent), Hero MotoCorp (3.08 per cent), M&M (2.70 per cent) and Tata Motors (2.11 per cent).

The auto index fell by 2.53 per cent to 24,280.80.

Among bank stocks, Bank of Baroda tumbled 4.12 per cent, IndusInd Bank dipped 3.98 per cent, HDFC Bank (3.34 per cent), Bandhan Bank (3.33 per cent), AU Small Finance Bank (3.22 per cent), ICICI Bank (2.31 per cent), State Bank of India (2.27 per cent) and Federal Bank (0.05 per cent).

The BSE bank index declined 2.29 per cent to 40,583.54.

The 30-share BSE benchmark Sensex tumbled 1,306.96 points or 2.29 per cent to settle at 55,669.03.

During the day, it plummeted 1,474.39 points or 2.58 per cent to 55,501.60.

"The surprise mid-cycle rate hike by the RBI is driven by factors such as inflation concern, the perception that the RBI is falling behind the curve, external sector pressures (capital outflow, higher trade deficit, weaker rupee) and likelihood of 50 bps rate hike by the Fed."

"The impact on the equity market is likely to be negative in the short term," said Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers.

Home, auto and other loan EMIs are likely to increase after the Reserve Bank of India (RBI) hiked its key interest rate by 40 bps in a surprise move on Wednesday in an effort to tame inflation that has remained stubbornly above target in the recent months.

The increase in repo rate - the rate at which RBI lends to commercial banks - to 4.40 per cent from a record low of 4 per cent is the first since August 2018.

It is also the first instance of the RBI Governor-headed monetary policy committee (MPC) holding an unscheduled meeting for raising interest rates.

The RBI also hiked the cash reserve ratio (CRR) by 50 bps to 4.5 per cent, which will now require banks to park more money with the central bank and leave them with less to loan to the consumers.

"The benchmarks tumbled hard in today's session after a surprise move by the RBI to raise repo rate by 40 basis points. The street was already nervous as Fed Chairman Jerome Powell already hinted towards half-a-point rate hike in today's meeting outcome scheduled late at night. Hence, investors are likely to feel the heat in the short term as central banks across the globe try to curb inflation by hiking interest rates," said Prashanth Tapse, Vice President (Research), Mehta Equities Ltd.

The RBI's surprise rate hike on Wednesday suggests that the central bank wants to act quickly before inflation derails the growth recovery, experts said.

In a move that will raise borrowing costs for corporate and individuals, the RBI after an unscheduled MPC meeting hiked the benchmark lending rate by 40 basis points (bps) to 4.40 per cent to contain inflation that has remained stubbornly above the target of 6 per cent for the last three months.

"We believe that the lending rates may go up gradually, and since there is enough liquidity in the system, our borrowing cost may go up only gradually. Most of the borrowing for us is fixed in nature and hence the rate hike will not have an immediate impact on borrowing cost," said Umesh Revankar, Vice Chairman and MD, Shriram Transport Finance.

According to V Swaminathan, Executive Chairman, Andromeda and Apnapaisa, the rate hike was on the cards as the policymakers were under immense pressure due to the rising inflation in the country and at the global level.

"All the loans that come under the Repo Linked Loan Rate (RLLR), especially the home loan and the Loan against Property will now cost higher and there can be a subsequent increase in other loans EMI as most of the banks have already started increasing the MCLR since the beginning of this fiscal year," he said.

Abhishek Goenka, founder of IFA Global, said the RBI did feel the heat lately and took the markets by surprise by hiking rates across repo and cash reserve ratio (CRR).

"We have lately seen large FMCG companies feeling the heat across their bottom-line which is clearly reflected in their prices and communication. The market was expecting a rate hike by RBI but in a slower pace," he said.

It is for the first time since August 2018 that the key interest rate has been hiked by the Reserve Bank with an aim to check the rising inflation.

The CRR too has been increased by 50 bps to suck out Rs 87,000 crore liquidity from the system.

"We expected a hike in June. The surprise move by the RBI to raise the policy rates a month earlier suggests that it does not want to wait and watch but act quickly before inflation derails the growth recovery," said Rumki Majumdar, Economist, Deloitte India.

Pradeep Multani, President, PHD Chamber of Commerce and Industry, said though the RBI's step is aimed at addressing the inflationary pressure, hike in the repo rate and CRR will hurt the consumer and business sentiments.

"The economy is still recovering from the pandemic impact of coronavirus, yet there are worries from geo-political developments, such as likely contagious impact on trade and finance," he noted.

Sandeep Bagla, CEO, Trust Mutual Fund, said market participants should expect at least a 35 bps hike in June as well.

In spite of the hikes, the monetary policy still remains accommodative, he said, adding, "It is like saying that your salary has been increased, but you still remain underpaid.

The implication is the rates need to be hiked far more than current levels.

" Rohit Arora, CEO and Co-Founder, Biz2Credit and Biz2X, said the rate hike in US is going to pressurise the RBI to start increasing interest rates in India too, which will lead to debt getting more expensive and further downward pressure on Indian rupee.

"The elevated inflation levels will further worsen and GDP growth rate will see a further fall from an expected 7 per cent growth to around 5.5-6 per cent," he said.

Aditya Damani, the founder of Credit Fair, said RBI had already given indications of monetary tightening last month.

Yet these actions were slightly surprising for the market since the meeting was unscheduled, he said.

Rajiv Shastri, Director and CEO, NJ AMC, said this rate hike is an attempt to control secondary inflation which can become sticky and persist even after commodity prices moderate.

It is a preventive measure and not a reactive one, he added.

George Alexander Muthoot, MD, Muthoot Finance, said there is adequate liquidity for productive requirements of the economy and as such borrowing cost in the system may go up at a gradual pace.

"We believe this is surely the beginning of the RBI rate hike cycle, although in a calibrated manner to respond to the evolving growth-inflation situation," he said.

Madhavi Arora, Lead Economist, Emkay Global Financial Services, said 2022-23 could see overall policy rates going up by 125-150 bps.

"The terminal rate may be a tad higher than 5.50 per cent, with the RBI now showing its intent to keep real rates neutral or above," she said.

The Reserve Bank's decision to hike key policy rates will impact the growth of real estate industry and may hit the housing demand, according to industry players.

The Reserve Bank of India (RBI) on Wednesday hiked the benchmark lending rate by 40 basis points (bps) to 4.40 per cent to contain inflation.

It also raised the amount of deposits that banks are required to maintain as cash reserve by 50 bps to 4.5 per cent to suck out Rs 87,000 crore of liquidity from the banking system.

Commenting on the policy, industry body CREDAI's President Harsh Vardhan Patodia, said, "The low repo rates had given a boost to the real estate sector during the course of the pandemic. Raising of repo rate by RBI is a surprise for real estate industry given the inflationary trends."

"We are witnessing trends of growth momentum in the realty sector and developers have largely stayed resilient in the midst of challenges from the pandemic.

Though this escalation will impact the buying power of consumers, we feel the impact will be taken in stride by the home buyers," he added.

Boman Irani, President, CREDAI-MCHI, said this sudden increase of repo rate coupled with inflation will indeed impact the industry's growth.

"Given the escalations and skyrocketing prices of raw materials, buyers may become reluctant to borrow from banks at a higher rate of interest.

Though RBI has maintained the benchmark lending rate at a record low for a long time, CREDAI-MCHI requests not to increase the rate further and to support the growth of industries," he added.

Anarock's Chairman Anuj Puri said this hike signals an imminent end to the all-time low interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began.

"Moreover, rising interest rates and inflationary trends in basic raw materials in construction including cement, steel, labour cost etc will add to the burden of the residential sector, which did significantly well in the previous quarter, Q1 2022," Puri added.

He further said this rise in interest rates will ultimately impact overall acquisition cost for homebuyers and may dampen residential sales to some extent.

Gulam Zia, Senior Executive Director, Knight Frank India, said the policy rate hike will translate into higher EMIs for home loans.

"However, we believe that improved homebuyer's attitude, preference for owning a house and strong wage growth will continue to support the housing market."

Amit Goyal, CEO, India Sotheby's International Realty, said this signals an end to the historical-low interest rates regime, as lending institutions will soon follow with increase in rates on deposits and loans.

"We don't believe though, home loan rates will increase by more than half to one percent this year. These are still fairly low interest rates and home buyers should make use of it," Goyal added.

Vikas Wadhawan, Group CFO, Housing. com, and Makaan. com, said the real estate industry is well positioned to manage any hike and was quite frankly expecting it as well to tackle the tight inflation.

"However, there will be a rise in the property prices coupled with the surging input costs, though the market sentiments, by far and large, will be stable," he added.

There will be an overall increase in the property prices but it will soon be balanced off because the market is strong and resilient, Nayan Raheja of Raheja Developers said .

Trehan Group's MD Saransh Trehan said this will marginally increase the cost of borrowing for property loan seekers.

"As the cost of home loan is only one component for a home buyer, the RBI's decision is unlikely to have any major impact on the real estate sector," he added.

Shraddha Kedia-Agarwal, Director, Transcon Developers, said the RBI's decision will further put a dent on the homebuyer's sentiments, impacting the overall demand.

This hike in policy rate is not welcome and will have a negative impact as home loan rates will increase immediately, Samantak Das, Chief Economist, and Head of Research and REIS, India, JLL, said.

Shiv Parekh, Founder, hBits, said, "Commercial real estate will benefit in the longer run with the rate hike. Especially income generating grade A properties will have more demand than other asset classes. Historically, real estate and gold have been used as a hedge against inflation."

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