The Hindu Business Line : Bad news for stocks, cheer for debt investors

With yet another round of policy rate hikes and talk of ‘aggregate demand pressures’, the RBI’s latest policy review signals that the central bank is willing to pull out all stops to battle inflation, even if this means tightening the purse strings for India Inc.

That is bad news for stock market investors, given the lag effect of rising interest rates on growth and corporate earnings. Stocks from rate-sensitive sectors such as real estate, banks, automobiles and capital goods, which had posted a tentative recovery in the run-up to the policy, may now face a setback.

For realty companies, the concern is that if rates continue to rise, property buyers will have to deal with rising borrowing costs along with still unaffordable prices. To prop up offtake, developers may have to adopt aggressive pricing, sacrificing profit margins in the process. Developers may also find their fund crunch magnified by the market’s increasingly cautious stance on lending to this sector.

For banks, the earnings outlook may depend on the extent to which they are able to pass on recent increases in costs. Increases in lending rates to corporate borrowers may soon follow. But effecting the same for retail borrowers may be tricky; with recent bank results already showing evidence of slower growth and rising delinquencies in the retail segment. Further rate increases may only peg up the credit risk for the bank.

Companies in capital-intensive sectors such as capital goods and infrastructure, already dealing with escalating interest costs for ongoing projects, may face a further squeeze. Needless to say, frontline companies in each of these sectors, with good credit ratings and access to funds, are better placed to weather these challenges than mid and small-sized companies.

But if rising interest rates present a threat to stocks, they do open up a fresh set of options for debt investors. Many banks have recently opened “special deposit” windows for 1-2 years that offer annual interest rates of 10-10.5 per cent. Mutual funds have rolled out fixed maturity plans that “indicate” yields of 10.5-11 per cent a year, a good 2 percentage points higher than six months ago. Liquid mutual funds, in which investors can park temporary surpluses, are now offering healthy (annualised) returns of between 8-9 per cent.

More Stories on : Credit Policy | Stock Markets | CRR & Bank Rates | Debt Market

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