The Indian stock market is expected to remain cautious ahead of the policy announcement, while rate-sensitive stocks could see increased volatility during the session. The anticipated rate hike comes as domestic inflation remains above the RBI's 4% target, while elevated crude oil prices add another external risk. Higher crude prices could put further pressure on India's inflation trajectory and widen the current account deficit.
Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, said a 25 bps rate hike appears inevitable amid rising inflation expectations and higher bond yields across most developed markets. He added that the rate hike has already been factored into market prices, making the RBI's policy stance and its estimates for growth and inflation the key areas of focus for investors.
Vijayakumar said the rate hike would be beneficial for banks as their margins are expected to improve with rising floating rates. He also noted that strong deposit and credit growth in the economy point to good prospects for the financial sector.
Real estate could see pressure as higher home loan rates raise borrowing costs and potentially affect housing demand, while developers with lower leverage may be relatively better positioned. Automobiles and consumer durables could also face some pressure as higher financing costs make vehicle and big-ticket purchases more expensive, potentially affecting demand. Meanwhile, capital goods and infrastructure companies could be impacted if higher interest rates lead to a slowdown in private investment and project activity.
Stock market in turmoil
The policy rate decision comes at a time when Nifty and Sensex have declined for 8 consecutive weeks, their longest losing streak in 25 years.The weakness in equities is not primarily a reflection of deteriorating domestic activity. Instead, investors are grappling with a mix of higher crude oil prices, rising global bond yields, currency risks and continued foreign selling.
The seven-month-old Iran war has pushed crude prices and bond yields higher, bringing inflation and interest rate concerns back into focus. With the US 10-year yield above 5%, global investors have a greater incentive to allocate money to relatively safer assets while demanding higher returns from riskier markets such as equities.
Foreign outflows have added to the pressure. FIIs have remained net sellers for seven consecutive weeks, while the Nifty declined 3.1% last week. Domestic investors have absorbed a significant portion of the selling, but foreign capital remains heavily concentrated in largecap stocks, which have a greater influence on the benchmark index.
Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.
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