RBI Monetary Policy: Will bank & auto stocks benefit from rate cut?

Heralding Diwali cheer, consumer stocks like banks and auto stocks rejoiced after Reserve Bank of India's decision to cut short term lending rate (repo rate) by 25 basis points (bps) to 6.25 percent. (Repo rate is the rate at which the central bank of lends money to commercial banks). Consumer sector is hopeful that rate cut will drive consumer sentiment and boost buying in the ongoing festival season.Meanwhile, RBI also signalled that banks should pass of benefits interest rates decline to consumers. RBI has reduced key interest rate (repo rate) by 175 basis points since January 2015. However, the banks have been reluctant to pass on the entire benefits to consumers.Bankex gained around 0.4 percent with SBI gaining 2 percent while ICICI Bank was up 1 percent from previous close on expectations that to rate cut may lead to lower rates for housing EMIs, car loans and corporate borrowing.Auto sector which has been on buyers radar after strong September sales. Auto index gained around 2 percent in last two days. Tata Motors and Bajaj Auto were up around 1 percent. After hitting record high yesterday, Maruti closed flat on Tuesday.Maruti Suzuki India Chairman RC Bhargava, however, feels that the rate cut scenario will take a little time for play through and it depends on how the banks pass on these rate cuts to the actual borrowers. “I do not think it is going to do very much for our industry because we are selling everything we can produce. If at all there is a problem with us, it is a problem of increasing production. So, the rate cut generally for industry is good, I think everybody has been wanting rate cuts for a long time and the expectation is that rate cuts will promote investment, will promote growth. And conditions today are such that inflation should not be a risk,” he said in an interview to CNBC-TV18. Keki Mistry, VC and CEO of HDFC also agrees that there may be some degree of rate cut being passed on to consumers over a period of time but not immediately. “So, if RBI cuts rates 25 basis points, the cost of funds of a bank do not come down by 25 basis points straight away. So, there is a time lag which takes place, you have to first reduce your deposit rates. As you reduce your deposit rates, your new deposit comes in at a lower rate. Over a period of time, the old deposits get cycled”, he said. RBI has reduced key interest rate (repo rate) by 175 basis points since January 2015 but banks have been reluctant to pass on entire benefits to consumers.The government had last week reduced the interest rates on small savings schemes by 0.1 percent for the October- December quarter of the 2016-17 fiscal. The schemes include, Public Provident Fund, Kisan Vikas Patra, and Sukanya Samriddhi Account.

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