After last weekend's interest rate hike by the RBI, all eyes will be set today on how stocks react to the same. Showing that it's getting increasingly worried about rising inflation, the RBI raised interest rates late last Friday. It raised both the repo and reverse repo rates by 0.25% each to 5% and 3.5% respectively. It would thus be interesting to see how interest rate sensitive sectors like auto, banking, and realty react today.
We see these rate hikes as insignificant to impact the economic recovery. Some have even pointed that the rate increases have come later than they should have. Inflation already is taking a bite out of India's economy. Wholesale prices, the most watched gauge of inflation, have risen to around 10%. Consumer prices are rising at closer to 17% over the previous year's levels.
Now, given that the economy is showing some signs of recovering, demand is picking up pace. This is likely to add to the inflation that is not showing any signs of cooling off. Economists expect a recovery in manufacturing activity, and rising fuel prices to push inflation higher over the next few months. And not to forget the government spending program that many see as a precursor to higher inflation in the future. All in all, the RBI has a long way to go in its fight against the price rise, which has now moved from food to other essential commodities like fuel.
As such, the RBI's latest action can be seen as a sign of things to come. With the central bank getting uneasy about rising food and non-food prices, we foresee more such hikes over the next few months. The next could well come on April 20, when the RBI will meet to review its annual monetary policy.
Now, how will the markets react to the RBI's move is anybody's guess. Investors in auto and realty stocks might not like the central bank's move. Even if this rate rise is not going to make loans and credit expensive, one can still expect a knee-jerk reaction of the markets towards stocks from these sectors. This is considering that companies from these sectors flourish in a low interest rate environment, and suffer when rates rise.
Whatever be the reaction of the markets today, we advise you to not act in haste. Treat any correction in stock prices triggered by RBI's latest and future rate hikes as healthy. This is considering that these will bring valuations of good quality stocks at reasonable levels for you to buy into them.