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Bank stocks in a sweet spot, say experts as RBI grows more hawkish

Bank stocks have already been rallying for a couple of months thanks to improved financial performance and recovery in economic activities.

August 05, 2022 / 02:08 PM IST
RBI Governor Shaktikanta Das. (File photo)

RBI Governor Shaktikanta Das. (File photo)

 
 
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With the Reserve Bank of India (RBI) restoring benchmark policy rates to pre-pandemic levels, bank stocks may emerge as winners and real estate names will likely take a hit, said analysts.

Bank stocks have already been rallying for a couple of months thanks to improved financial performance and recovery in economic activities. Meanwhile, real estate stocks have also risen due to record sales in recent quarters.

“We have seen system liquidity tighten since the RBI started withdrawing excess liquidity, and system credit growth improved to 14 percent. With credit growth looking up, we believe the banks with a higher share of floating rates and a robust CASA-led deposit franchise should be placed well in this increasing interest rate environment,” said Naveen Kulkarni - Chief Investment Officer, Axis Securities.

The central bank raised repo rates by 50 basis points on August 5, higher than expected to tame inflation which hovers around 7 percent, more than the mandated tolerance level of 6 percent. Though the RBI said inflationary pressures seem to be easing, the geopolitical tensions, volatility in global financial markets, and emerging risk of the global recession continue to remain key risks.

“We expect markets to stabilise post the initial reaction. Overall, we remain positive on the banking sector and are constructive on the equity markets given our strong conviction on a multi-year upcycle in the Indian economy,” said Jaideep Arora, CEO, Sharekhan by BNP Paribas.

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Shishir Baijal, chairman and managing director, Knight Frank India, said with the cumulative rate hike until today, assuming complete transmission, prospective home buyers’ affordability shrinks by around 11 percent.

This means a buyer who could have afforded Rs 1 crore worth of house before the RBI started raising rates can now afford a house worth Rs 89 lakh only. This puts the onus on real estate companies to take action. “Developers are expected to undertake mitigating measures to soften the blow on homebuyer affordability,” said Baijal.

"The hike by 50 bps is definitely on the higher side, and home loan lending rates will now edge further into the red zone," said Anuj Puri, Chairman – ANAROCK Group. "This whammy comes along with the inflationary trends of primary raw materials, including cement, steel, labour, etc., that have recently led to a rise in property prices. Together, these factors will impact residential sales."

Despite these concerns, Nifty Real Estate continued to rise on August 5. Indiabulls Real Estate, Lodha and Sobha were the biggest gainers. Overall market also maintained its gains driven by banking stocks. Though, Nifty Auto which is another rate sensitive sector traded in the red.

What others say:

Sampath Reddy, CIO, Bajaj Allianz Life Insurance

With the hawkish policy today, bond yields have hardened and we expect them to remain elevated in the near term. RBI’s future course of action will continue to be data dependent and influenced by global factors.”

Amar Ambani, Head - Institutional Equities, YES Securities

We see RBI delivering yet another rate hike, probably a mild one (25bps) in October to ensure that price pressure remains under control before it peaks during Q3FY23. We see the repo rate peaking around 5.7-6 percent.

Akhil Mittal, Senior Fund Manager-Fixed Income, Tata Mutual Fund

As we are much better relatively in terms of growth and inflation, we might not have to tighten as aggressively as western countries and hence might not need to turn around policy direction sooner, which reduces policy uncertainty. RBI has chosen to be cautious now and leave policy space for future support to growth.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Shubham Raj is a journalist with over five years of experience covering capital markets. His last stint was with The Economic Times where he wrote on daily happenings in stock markets and led IPO reportage. He also wrote on mutual funds and cryptocurrencies.
first published: Aug 5, 2022 01:01 pm
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