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Betting on interest
rate-sensitive stocks
Dont get carried away by the
current rally; be picky and take a
stock-specific approach
The surprise interest rate cut by Reserve Bank of India (RBI)
Governor Raghuram Rajan last week sparked a rally in ratesensitives. Banking, automobiles and realty stocks rose by up
to 18 per cent on Thursday after RBI cut the repo rate by 25
basis points to 7.75 per cent.
Is this the right time to bet on these sectors? The cut is
expected to revive consumption and spur credit growth.
Besides, analysts expect reduction of another 50-75 basis
points in the coming months, if both inflation and the fiscal
deficit situation remain under control. Since banks are a
play on the health of the economy, they are likely to be a
direct beneficiary. However, one has to be picky as these
stocks are not cheap and the BSE Bankex has posted gains of
75 per cent in the past year.
It may be a good idea to shop for quality public sector
banks (PSBs) at this point. While many private sector lenders
are trading at 2.5 to three times book valA decline in
ue, PSBs are trading at one or less than
one time book value, said A K
inflation will
Prabhakar, an independent analyst. He
bring down
labour costs for added the worst seemed to be over for
PSBs and their asset quality was likely to
automobile
firms, and lead improve in the coming quarters.
The automobile sector might also see
to cost
better days ahead, with the rate cut comoptimisation
ing on the back of falling raw material
prices of steel, aluminium and rubber. Even a small decline
in equated monthly instalments can significantly alter a
customer's decision to purchase four-wheelers, so auto sales
are likely to get a boost from the rate cut, said Narayan
Shroff, director (wealth and investment management) at
Barclays India. Analysts expect auto sales to pick up after
June. The surge in demand, however, will be restricted to
four-wheelers and trucks, as the ticket size for purchasing
two-wheelers is small and not impacted by interest rate cuts.
The decline in inflation will bring down labour costs for
automobile firms to some extent, leading to cost optimisation. Auto component makers with adequate capacity are
also likely to benefit.
Apart from direct investing, investors can look at mutual funds to invest in interest rate sensitives.
Look at equity diversified funds with 20-30 per cent exposure in financials and 5-10 per cent in automobile companies.
Banking sector funds are another option, provided the investment is restricted to 10-15 per cent of ones equity portfolio.
According to Manoj Nagpal, managing director and CEO of
Outlook Asia Capital, one must use a target-based exit strategy for these funds. For example, Nagpal says, exit on gains
of 40-50 per cent or on a rate cut of 50 basis points (bps).
Stay away from realty stocks, however. Many realty firms
have high debt on their books with huge inventory build-up.
Realty prices have moved up exponentially in the past few
years and property is beyond the reach of urban middle class.
Until prices come down, demand for home-buying is unlikely to pick up in a hurry, said Prabhakar. For sentiments to
improve, a rate cut of at least 100 bps is necessary, he added.
In the past year, the BSE Auto and BSE Realty indices have
surged 59 per cent and 21 per cent, respectively.
ASHLEY COUTINHO