Stocks shed gains on RBI rate hike

Tue, 25 Jan 01:30 pm

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The Indian markets shed a significant part of their gains post the announcement of the RBI raising key interest rates. Nevertheless, India's benchmark index, the BSE-Sensex, is still trading above the dotted line. Pressure is being witnessed in stocks from the banking, FMCG trading in the red. Realty and auto stocks are amongst the other under performers. Stocks from the capital goods and consumer durables are leading the pack of gainers.

The BSE-Sensex is trading higher by about 50 points (up 0.3%), while the NSE-Nifty is trading 17 points (up 0.3%) above the dotted line. The BSE Midcap is up by 0.2%, while BSE Small cap index is trading 0.3% above yesterday's closing. The rupee is trading at 45.57 to the US dollar.

The RBI hiked key interest rates - repo and reverse repo rates - by 0.25% today. But the motive behind the same seems to be arresting the rise in food prices. But unless steps are taken to enhance outputs, food inflation may get more pronounced. In addition, the government must improve the quality of expenditures. The RBI believes that subsidies only keep a check on supply side inflationary pressures. Instead committing more resources to capital expenditure may help remove bottlenecks to it. Anyways following this development, banking stocks have come under pressure with ICICI Bank, Oriental Bank, PNB, HDFC Bank and Kotak Bank leading the pack of losers.

Auto stocks are currently trading weak led by TVS Motor, Tata Motors and M&M. A leading business daily has reported car manufacturers are increasingly looking at penetrating smaller towns and rural areas to boost volumes and also diversify from the competitive metro regions. OEMs such as Maruti Suzuki, Hyundai, General Motors and M&M are believed to be expanding their operations in these regions. Considering that the competition and penetration levels in these regions are low, these companies could stand to benefit significantly. Also factors such as lower dependence on financing coupled with high aspirations for owning four-wheelers would drive volumes in these markets over the long run. In fact, some of these players have already have begun tapping these markets over the past few years. Maruti Suzuki, for example, sells nearly 20% of its volumes in these regions. Three years ago, volumes from these regions formed about 3 to 4% of total volumes. Being India's largest passenger car manufacturer, this would definitely give the company confidence of beefing up operations at in these regions.

However, it would be interesting to see the situation a few years down the line considering the international players very well knowing the potential of rural and semi-rural markets. And thus, competition in these regions would gradually increase.