What does the rate cut mean for investors?

The big bang, and more than expected, rate cut by RBI Governor Raghuram Rajan yesterday is the talk of the town and also brought the Indian equity markets back to life. For quite some time all eyes had been on Rajan and what will he announce on Tuesday. When he finally announced a cut of 50 basis points in interest rates, bringing down the repo rate to 6.75% (lowest in 4 years), investors on Dalal street cheered resulting in equity markets closing on a positive note on Tuesday and also today.

RBI Monetary policy - Raghuram- RajanIndia has been battling lower growth and higher inflation for a few years now, but with inflation easing it had been eminent that the interest rate would come down in order to boost investment and growth. A lower interest rate regime helps companies and industries get access to cheaper credit and fuels up the economy, while it of course poses the risk of higher inflation. Precisely why Rajan had not been kneeling to political pressure of bringing down rates. But when he announced a cut yesterday everyone was surprised and had one question looming on their minds – Has Rajan finally gave up to the political pressure? Clearing his stance on this higher than expected rate cut, he said “We want to make sure that word sustainable and growth go together. Both are are important. And that’s why we used what room we had. But I don’t think we were excessively aggressive. We were not throwing out Diwali bonus.”

What does this rate cut mean for investors?
The rate cut will help certain sectors and companies more than others. Here’s a brief of the sectors and companies that will be affected the most by the rate cut:

– Leveraged Companies: Companies that are highly leveraged will get a breather like Hindalco, DLF Ltd, Bharti, Indiabulls Real Estate, PVR, Tata Steel, Dish TV, Phoenix Mills, Adani Power and India Cements.

– Banks: While lower interest rates can drive in more customers, it also puts pressure on margins and could be negative in the short term for the banks. Banks and NBFCs with a greater share of wholesale funding can however benefit from the rate cut like IndusInd, Shriram Transport Finance and Axis. Some of the banks have already announced a cut in their base rates include SBI by 40 bps to 9.3%, Andhra Bank by 25 bps to 9.75% and Bank of India by 25 bps to 9.7%.

– Autos:
A rate cut just before Diwali has already cheered up auto companies as the cut will help them achieve higher sales as customers benefit from lower EMIs. Positive for companies like Maruti, Shriram Transport, Mahindra and Mahindra.

– Real estate:
After auto, real estate is the most interest rate sensitive market and the rate cut will be positive for the sector as it will spur demand, esp ahead of the festival season. Companies like Prestige and Sobha will benefit.

– Housing finance:
They get the dual benefit of lower cost and higher demand {thanks to lower mortgage rate}. Positive for companies like HDFC, Indiabulls Housing Finance and LIC Housing Finance.

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