The 50 basis points hike by RBI in its key interest rates came as a shocker to analysts and brokers, who had been expecting a maximum hike of 25 basis points.
“RBI has clearly been hawkish by increasing the rates significantly. They are willing to sacrifice growth to anchor inflation,” said Mr Vaibhav Agrawal, VP – Research and Banking, Angel Broking.
Most analysts feel that the banking, auto, infrastructure and real estate will be the most impacted sectors. Consumers will now feel a genuine pinch with the hike in rates.
“The rates will remain high for a while now and a further rate hike cannot be ruled out. Individual as well as corporate borrowing will be impacted heavily,” said Mr Dinesh Shukla, Banking Analyst, Sharekhan.
“As the markets are driven by sentiment, people are losing faith in the equity market and are diverting funds to the debt markets. With the rate hike by the RBI, the fixed deposit rate may also increase from the present 9.75 per cent to 10.5 percent. This rate is lucrative looking at the present conditions,” said Mr Bharat Shah, Head of Institutional sales, Ventura Securities.
However, Credit Suisse believes that rate hikes are only a signalling mechanism in India, and they will not impact inflation in a meaningful way unless the structural factors driving inflation are managed through reforms or fiscal prudence.
“RBI is concentrating more on the demand side inflation build up at this point. We feel that there should be a prudent government policy on the supply side to complement the demand side inflationary build up,” said Mr Yadnesh Chavan- Fund Manager, Fixed Income, Mirae Asset Global Investments (I) Pvt Ltd.
“We expect yields to remain under pressure due to continuous supply of government bonds by means of borrowing, pressure on fiscal deficit due to increased subsidy burden, strained liquidity in the system and continuance of increasing trend in inflation despite the hike in operational policy rates,” he added.
“Most people thought that the rates would ease after three to six months but it seems like we will have to wait longer. We will hopefully see a better macro environment in the first half of FY13,” said Mr Agrawal.
Corporates were already ruing the high cost of funds resulting in their margin squeeze and another hike of 50 bps would further adversely affect their demand and profitability. Industrial production has already started to trend downwards due to tight monetary regime and going ahead the growth momentum of India Inc is likely to dampen further. The medium term trend of the market has turned bearish and interest rate sensitive stocks such as banking, auto, realty, etc should be avoided for the time being, said Ms Shanu Goel of Bonanza Portfolio Ltd.