Why did some stocks react to the RBI’s decision to hold interest rates?
The stocks that rallied in the wake of the RBI’s monetary policy announcement on April 7 were predominantly a category broadly referred to as interest-rate sensitives.
Investors bet that these firms stood to gain from the central bank’s decision.
Why are these stocks termed as interest-rate sensitives?
Prevailing interest rates may determine the pace of sales growth in specific sectors. When benchmark interest rates change, the fortunes of these sectors are in turn impacted. This reflects in their stock prices.
Which sectors are most sensitive to rate changes?
Firms whose products are mostly purchased using financing options as well as providers of credit are the most directly and immediately impacted by rate moves.
While housing and real estate firms and automakers rely heavily on the availability of affordable credit to fund their customers’ purchases, banks, non-banking financial companies and housing finance firms are affected whenever the cost of credit falls or rises.
How do these stocks react?
As stock prices are indicative of future profits of firms, stock prices of banks, auto firms and companies servicing the housing sector tend to react quickly to such announcements. When RBI raises benchmark rates, it could well mean that lending institutions have to raise their own lending rates. For, they have to pay a higher rate when they borrow from the central bank.
That means that home loan and auto loan rates for retail borrowers would increase, potentially dampening the keenness among buyers to purchase these products.
When RBI lowers rates, borrowers have to pay a lesser rate than earlier for the same product price.