CRR: Avoid interest rate sensitive sectors

RELATED NEWS Mkt reaction to RBI stance to be short-lived: Ambit Capital RBI move could dampen equity markets: JP Morgan CRR hike, global cues could trigger volatile session RBI again raises CRR to rein in inflation RBI hikes CRR by 0.5% in two stages ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets HDFC Bank BSE | NSE 25/05/12 Are Mutual Funds betting on HDFC Bank? Other Stocks in this news Infosys | IVRCL | Tata Consultancy Services | Unitech |

The war against inflation has turned brutal, or so it seems. After market hours yesterday the Reserve Bank of India stepped in for the second time in two months, with the most potent monetary policy tool at its disposal. It hiked the Cash Reserve Ratio by 50 basis points.

This is to be done in two phases - a hike to 5.75% from February 17 and 6% from March 3. It is expected that close to Rs 14,000 crore will get sucked out of the system following this move. The RBI has taken this decision in view of what it calls the paramount need to contain inflation.

 

The CRR hike will weigh down heavily on the shoulders of the market and the banking space. Since the last CRR hike, public sector banks have been under performing, and now with this hike, their under performance might get even more exaggerated.

 

Technical analyst Ashwani Gujral believes that interest rate sensitive sectors will show breakdowns. He mentions, "I would be keeping away from PSU banks, realty, autos, metals and construction stocks where home loans or auto loans could be the play."

 

From the market perspective, while bank stocks will see a sell-off, real estate stocks will go through a battering because interest rates will go up even more and people will start worrying about what happens to the real estate sector.  Though the sector showed some signs of stability yesterday but it is expected to get a whack once again today.

 

These are the two areas to watch out for. However, with every successive rate hike, the whole credit growth paradigm is now shifting down. While growth paradigm needs to be re-looked at, housing loans, consumer loans, and all interest rate sensitive sectors will have to be re-looked at once again.

 

Ashwani Gujral comments, " Unitech is not as weak as the other realty stocks but generally when a sector breaks down, the last to fall is probably the blue chip of that space which is looking weak now. If it sustains below Rs 420, it could go down to Rs 315. Also, some of the construction stocks are taking a hit now. IVRCL could test levels of Rs 290-295 in this fall. It needs to maintain above Rs 405 for some kind of strength. These are sectors to be stayed away from in the immediate short term but at lower levels, they could become attractive again."

 

Gujral is of the opinion that one should stay away from public sector banks. "They would clearly under perform as there is no reason to be long in them. On most rallies, you need to be out of the public sector banks. Their cycle probably has reversed in a declining interest rate environment. These stocks tend to do very well but now with interest rate pressure on this would be a sector, which would underperform." 

 

However, Jai Prakash Sinha of Ambit Capital believes that one should consider this to be an opportunity to enter the banking universe. He says, "I think I will look at it as an opportunity because if you look at some of the large banks, they are down 3-4%, yes in the short-term they are going to make some amount of opportunity losses and then they have enough measures to back the same, so I would look at it as an opportunity to enter the banking space.

 

In accordance with CRR hike, Adrian Mowat, Chief Asian and Emerging Equity Strategist at JP Morgan says that CRR hike has the potential to significantly dent equity markets.

 

"People are going to be anxious about the thematic sectors whether that be construction building material, to some extent public sector banks, which we think will see some problems as interest rates have moved higher."

 

Moreover, Mowat suggests that one should be cautious on smaller midcaps and only look at blue chips. He says, "We would be recommending clients to focus on big blue chips. Be quite cautious about smaller midcaps, they tend to be the areas that suffer the most when interest rates are rising. So our advice is to buy stocks like HDFC , which on the margin, should get market share gains as interest rates go up and the banks are less likely to compete in the home loan market."

 

He feels that one should also look at the IT companies. He comments, "IT companies will benefit if this event causes a weaker rupee, they tend to be very cash rich and so are less concerned about rising interest rates and so it's again blue chips, it is out there - buying a TCS , Infosys , is what you should be doing in the current environment."

 

By Surya Surendran (With inputs from CNBC-TV18)