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RBI girds up to fight inflation

Monetary policy response will help preserve macro-financial stability, says RBI governor as he announces benchmark rate hike

No Band-Aid for realty, FMCG players Expect further

Wounded sectoral indices end Wednesday in red
KRISHNA KANT panies also outperformed the broader market
THE CHANGES IN THE VARIOUS SECTORAL INDICES
Change %
rate hikes: Debt
Mumbai, 4 May as the BSE IT Index was down only 1 per cent
on Wednesday.
(As on May 4) Close YTD 1-day
fund managers
A
S&P BSE Sensex 55,669.0 -4.4 -2.29
surprise rate hike by the Reserve Bank The BSE Consumer Durables Index was the
of India (RBI) on Wednesday led to a worst performer on Wednesday, down 3.88 per S&P BSE Auto 24,280.8 -2.2 -2.53
general sell-off on Dalal Street. The cent during the day. In contrast, the index was S&P BSE Bankex 40,583.5 0.4 -2.29 CHIRAG MADIA AVERAGE RETURNS ON
benchmark BSE Sensex closed the day at 55,669 among the top performers in 2021 and up 47.3 Mumbai, 4 May
- down 2.3 per cent from the previous day. All per cent last calendar year. S&P BSE Consumer Durables 40,039.3 -10.6 -3.88 KEY DEBT FUNDS
sectoral indices ended the day in red, indicating It was followed by the BSE Realty Index that S&P BSE Finance 7,612.5 -5.4 -2.63 The Reserve Bank of India (RBI)  3 months  1 year (in %)
that investors see a broader impact of the rate was down 3.31 per cent on Wednesday. This is a on Wednesday made a surprise
S&P BSE FMCG 13,869.8 0.6 -1.67 Gilt with 10 year 0.15
hike by the central bank. big reversal for real estate developers that were announcement by increasing the
constant duration -0.3
The relative movement in the various sec- among the top performers last year, with a 55 S&P BSE Healthcare 23,444.5 -10.5 -2.92 repo rate by 40 basis points (bps)
toral indices, however, suggests that the biggest per cent rally in the Realty Index in 2021. S&P BSE Information Technology 31,189.1 -17.6 -1.05 to 4.4 per cent with immediate 0.39
worry for equity investors is the potential Automakers also underperformed the effect. Debt fund managers in the Gilt
S&P BSE Metal 21,191.3 10.1 -2.89 1.84
decline in demand for interest rate-sensitive broader market and were down 2.53 per cent country say investors should
items, such as homes, motor vehicles, and con- on Wednesday. S&P BSE Oil & Gas 19,426.6 11.0 -0.44 expect further rate hikes and look Medium to 0.34
sumer durables. Analysts are not surprised. S&P BSE Realty 3,418.5 -11.0 -3.31 to invest in money-market instru- long duration 2.57
In comparison, investors see a mild negative “The rate hike will translate into higher ments, floating-rate funds, and
impact for companies in the fast-moving con- interest on home, vehicle and consumer S&P BSE Telecom 1,683.1 -7.2 -2.73 target-maturity funds. Corporate bond 0.77
sumer goods space (FMCG) and oil and gas. durables loans. It will raise their ownership Compiled by BS Research Bureau Source: Blooomberg, exchange “Debt mutual funds (MFs) will 3.28
In the financial services space, non-bank cost,” says Dhananjay Sinha, managing director see a loss on Wednesday across 0.87
lenders are expected to fare worse than com- and chief strategist, JM Financial Institutional The rate hike is also expected to hit com- services space, non-bank lenders, such as Bajaj the maturity spectrum. However, Liquid
3.33
mercial banks in the new environment. Securities. panies in capital-intensive or debt-heavy sec- Finance, LIC Housing, and Poonawala Fincorp, one can start investing in funds
As on May 2 Source: Value Research
In contrast, oil and gas producers and power In contrast, he only sees little or no impact tors, such as metals and mining and telecom- were the top losers, while decline in commercial up to a two-year maturity, espe-
utilities ended the day in green as investors on the demand for staples and personal care munications (telecom). banks was in line with the index. cially roll-down funds like
expect them to gain from higher inflation in products largely bought with cash. This The BSE Metal Index was down 2.89 per The BSE Bankex was down 2.53 per cent, TRUSTMF Banking & PSU Debt cent (at the very least). That sug-
the economy. explains a marginal 1.67 per cent decline in the cent, while the BSE Telecom Index ended the while the BSE Finance Index down Fund, which will have a yield of gests further rate increases of 75
Information technology (IT) services com- BSE FMCG Index on Wednesday day with a 2.73-per cent cut. In the financial 2.63 per cent. 6.25 per cent now. September is bps or more in the near term.”
when I expect most of the turmoil Typically, the prices of fixed-
in bond markets to be largely over income securities are dictated by

THE COMPASS Markets caught off guard by and investments in long bond
funds could be made then,” says
Sandeep Bagla, chief executive
prevailing interest rates. Interest
rates and prices are inversely pro-
portional. When interest rates

Mkts may see more Reserve Bank’s surprise move

officer, TRUST MF. decline, the prices of fixed
On Wednesday, 10-year gov- income securities increase.
ernment bond yields ended the Similarly, when interest rates are
corrections, volatility PUNEET WADHWA officer, Avendus Capital
Public Markets
SENSEX which will take the ter-
minal repo rate to 6 per
day at 7.4 per cent, against
Monday’s closing of 7.1 per cent.
In the past year, some debt
hiked, the prices of fixed income
securities come down.
Consequently, the longer
Money may move out of rate-sensitive New Delhi, 4 May
Alternate Strategies. cent by Q3FY2023,” categories like money-market duration debt instruments are
stocks into less-affected ones The out-of-turn hike in repo rate by 40 The development saw wrote Sonal Varma, chief funds, ultra-short-term duration more prone to intense volatility
DEVANGSHU DATTA basis points (bps) to 4.4 per cent with the markets tumble, with economist (India and and dynamic bonds have given during a period of rising
immediate effect and a 50-bps hike in the S&P BSE Sensex slip- Asia ex-Japan), Nomura, returns in the range of 3 per cent. interest rates.
The Reserve Bank of India (RBI) has decided to tighten money
the cash reserve ratio to 4.5 per cent by ping over 1,100 points in in a recent co-authored Market participants expect Dhawal Dalal, chief invest-
supply and raise policy rates in an out-of-cycle meeting of
the Reserve Bank of India (RBI) on intraday deals to around note with Aurodeep the pace of policy normalisation ment officer-fixed income at
the monetary policy committee (MPC). The RBI has also pre-
emptively responded to the US Federal Reserve’s (Fed’s) Wednesday took the markets by surprise, 55,800-levels. Alterna- Nandi. to likely get faster after the out- Edelweiss MF, says, “Investors
increasingly hawkish stance, with the Fed expected to hike said analysts, who expected the central tively, the Nifty50, too, In the last policy of-turn hike in repo rate. with long-term fixed income
US policy rates this week. bank to hike rates only in June. shed over 1.5 per cent, or meeting in April, the R Sivakumar, head — fixed allocation should probably wait
Note that the Wholesale Price Inflation (WPI) print (not a “The hike in rates, although 260 points in intra-day monetary policy com- income at Axis MF, says, “It until the June monetary policy
direct RBI trigger) is double the Consumer Price Index-based expected, was only likely to come trade, and tested the mittee of the RBI had would seem the RBI would want and allocate a portion of their
inflation, which is well above the RBI’s upper limit of 6 per through in the June policy review. The 16,800-mark. shifted its focus to to normalise liquidity within the surplus (25 per cent) after the
cent. A higher WPI implies corporates cannot pass on input- quantum of hike (40 bps) in this out- “India is on the cusp Sources: Bloomberg, exchanges tackle rising inflation in next 12 months, and possibly outcome and keep allocating 25
cost increases. This, in turn, means profit margins are under of-turn announcement was also a sur- of a policy-normalisation India after the Russian raise the repo rate above the per cent each after subsequent
pressure. The impact of a rate hike is negative for most sectors. prise as the markets expected the RBI cycle. Elevated Consumer Price Index invasion of Ukraine led to a surge in expected inflation rate. With policy outcomes in target
The cost of funds increases for the financial sector and if they to hike by 25 bps. The indices will take inflation in 2022-23 (FY23) will likely commodity prices, especially of crude inflation projected to average maturity bond exchange-
pass it on, demand for credit slides. their cue from what the US Federal mean a delayed policy catch-up. We oil, which zoomed to over $140 a barrel around 5.1 per cent in January- traded funds/bond index funds
For example, transport and housing Reserve (Fed) and other global central expect 200 bps in cumulative repo rate — a 14-year high. March, it would seem the RBI is maturing in five- to 10-year
tend to see falling demand because Base=100
140 banks do to tame inflation,” said hikes by the third quarter (Q3) of FY23, signalling repo rates to go back residual maturities, depending
sales in those sectors are driven by debt. BSE Bankex
SENSEX Vaibhav Sanghavi, co-chief executive starting with a 25-bps hike in June, Read full stories on business-standard.com to pre-pandemic levels of 5.15 per on their comfort.”
Capital-intensive and working capital-
intensive businesses see costs of 120

Prepay, switch to tackle rise in home loan rates

finance increasing. Gaurav Gupta, founder and CEO,
Debt funds also get hit by withdra- 100 MyLoanCare, believes new borrowers
wals, reducing their assets under man- BSE Finance will be better off going for a repo rate-
agement and suffer drawdowns in net linked loan rather than one bench-
asset value. Sectors and companies with May 3,‘21
low debt tend to be less badly affected.
May 4,‘22
80
New borrowers must avoid over-leveraging; prepare to cough up more as down payment marked to the prime lending rate
(PLR). “Repo rate is an external
However, a higher interest rate can help
SANJAY KUMAR SINGH one of the major drivers of home HOW RATE HIKE An MCLR-linked loan may reset benchmark, while PLR is an internal
protect the rupee, which is likely to come under pressure as
the dollar-Fed funds rate goes up. sales across the country since the after several months (assuming your one. HFCs can exercise some discre-
In general, valuations of risky assets will fall. Some investors The Reserve Bank of India (RBI) pandemic began,” says Anuj Puri, WILL IMPACT EMI loan is linked to a 12-month MCLR). tion in how much they raise their
use an inverted price-to-equity (P/E) ratio, calculating earnings hiked the repo rate from 4 to 4.4 per chairman, Anarock Group. When principal amount is ~50 lakh Hence, do a detailed analysis of costs loan rates,” says Gupta.
as a ratio of price as a benchmark to judge equity ‘yield’. The cent on Wednesday. Home loans Experts expect rates to continue before shifting. Banks, whose rates are linked to
from banks are linked to the repo hardening for some time, given the Interest EMI Total Home loan balance transfer can an external benchmark, could pos-
Nifty for example, is trading at a P/E of 22-odd, which may be rate (~) interest
inverted to calculate an equity yield of 4.5 per cent. Risk-free rate. This hike will translate into high and persistent nature of infla- also reduce your interest burden. sibly hike the spread on their loans
higher equated monthly instalments tion.
(%) payable (~) “The evaluation regarding (for new borrowers).
government treasuries are available at a yield of 7.3 per cent.
Logically, equities must correct more to be attractive. The gov- (EMIs) on new home loans (com- Original 7 38,765 43,03,587 whether to shift must be done every “Comparing rates will become
ernment must also pay more for its borrowings. pared to pre-hike levels). Plan your prepayments quarter. If you have more than 15 crucial in a rising rate scenario,” says
Many investors are spooked by the thought that this rate For existing borrowers, Existing borrowers must go Revised 7.4 39,974 45,93,875 years of tenure left, switch if there is Shetty.
hike and associated cash reserve ratio hike (effective from the tenure will increase, in for planned prepayments. a difference of just 25 bps between Budget for higher rates in the
May 21) is the start of a trend of tighter money. This is likely which will translate into a “Use any windfall or sav-
Difference 0.4 1,209 2,90,288 your existing rate and the best rate future.
going by the MPC statement and the governor’s statement. higher interest burden. ings to prepay,” says Adhil For existing borrowers in identical situation, you can get. If 10-15 years are left, the “Avoid over-leveraging in these
The RBI kept an accommodative stance with high liquidity But if the limit on tenure Shetty, chief executive whose EMI remains the same, tenure could rise by difference must be 50 bps. And if 5- circumstances. A rate that appears
and low rates for the last two fiscal years. It may now make — usually retirement age officer (CEO), BankBazaar.
15-18 months. This is an illustrative example
Source: BankBazaar 10 years are left, it must be 65-70 inexpensive today may not remain
several successive hikes and tighten liquidity more. The pro- for salaried employees and According to him, borrowers bps,” says Aditya Mishra, director- so in the future,” says Gupta.
jected gross domestic product growth rate for 2022-23 is likely
to be downgraded as a result.
65 years for the self-
employed — gets breached,
YOUR should aim to prepay 5 per
cent of the loan balance
a repo rate-linked loan after careful
calculation.
home loan desk, 4B Networks. Higher interest rates will reduce
the loan amount new borrowers are
Another worry: rate hikes may not work. Tighter money their EMI could also rise. MONEY every 12 months. “Unless the difference is more Compare rates eligible for.
reduces demand, but this round of inflation is caused by “By prepaying at this than 50 basis points (bps), you could In a rising rate scenario, home “Get ready to arrange a higher
supply issues, not excessive demand. There are shortages (or Rates headed up optimal rate, you can reduce the loan stay put in certain circumstances," finance companies (HFCs), whose down payment,” says Shetty.
fears of shortages) of industrial metals, fuels, and agro-com-
Interest rates are headed upward. tenure from 20 years to 12,” he adds. says Shetty. loan rates are not linked to an exter- Finally, with prepayment becom-
modities caused by the Ukraine war, and there’s a shortage of
manufacturing inputs due to China lockdowns. Monetary “The RBI’s rate hike signals an Borrowers still on a loan linked to EMIs on repo rate-linked loans nal benchmark, could hike their ing crucial, go with a lender that
policy cannot address such problems. imminent end to the all-time low the marginal cost of funds-based are expected to be revised from next rates by more than the quantum of offers easier terms and conditions for
interest rate regime, which has been lending rate (MCLR) should shift to month. the repo rate hike (40 bps). prepayment.