The Reserve Bank of India (RBI) raised policy rates by 50 basis points to 4.90%. The stock market’s first reaction was favourable, with benchmark indices rising until the second half saw a rapid fall of 200 points in Nifty.
The main motive behind the hike of policy rates is to slow down the speed of increasing inflation, as food and metals are getting close to absolutely unaffordable to those who are less financially privileged.
The rate hike will result in two things;
- Companies running on fundraising or borrowing will have to pay more interest to the lenders than they used to. Hence, they will have their net profits reduced. This indicates that as a result of the repo rate hike, corporations are cutting back on expansion investment, resulting in a drop in growth and a negative impact on earnings and future cash flows, culminating in a drop in stock values.
- Retail customers will also feel the pain of increased interest rates while taking a loan. Discretionary expenditures will have to be controlled due to this as well. Due to the higher interest rates, retail debtors will have to pay more interest rates whenever they borrow money. Hence, a dip in the buying of cars, real estate and large electrical goods will be widely observed.
Thus, going forward, we may see real estate, infra, automobiles, and large electronics (white goods) manufacturers take a beating. On the other hand, the rate hike may turn out beneficial for the banking sector. Sectors like FMCG and IT are also likely to face some heat, though it may not be as bad as hellfire.
For the real estate sector, whose fortunes are wedded to interest rates, each of these rate hikes will be an unnerving event. According to predictions, by the time the RBI completes the rate hiking cycle, interest rates will have risen to approximately 8%. Though it will still be less than 12% of the days during the 2008 financial crisis, there may be some severe consequences.
Now, the question is which stocks can perform better in such market scenarios. Let’s think of some ideas around this.
First, stocks which are debt-free or with less debt can give some amount of stability to our portfolios. They are less likely to see much difference in net profitability due to the interest rate hikes. Stocks like ITC, Cipla, Coal India and HUL fall into this basket. Although, as they say, nothing is risk-free. Due to falling demand, fundamentals may still change.
Next, we can think of non-discretionary products which are purchased because they meet basic needs like food, shelter and healthcare. HUL, Cipla, and ITC are good bets in this category too.
Retailers opt for fixed-income securities such as FD in banks. ICICI Bank and HDFC Bank may thus find some green shoots of growth in this scenario, making them good candidates for our portfolios.
Dividend stocks are also attractive in such cases as the dividend payouts tend to manage risks well during falling markets. Coal India and ITC are again good bets here.
If you have any more common-sense investing ideas for this rate hike period, I would love to hear them in the comments!
Manvendra Pratap Singh is the Founder and CEO of Trinkerr. He is an IIT Kanpur-IIM Lucknow alumnus and an investor with 15+ years of experience.