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Tuesday, May 3, 2011

Impact of RBIs Credit Policy on Capital Market

Both the Indian major indices Sensex and Nifty were down by 463 and 136 points respectively, followed by RBIs annual credit policy. Rate sensitive stocks led the decline on fears of rising interest rates which could reduce the profitability.

BSE Auto index was the top looser which dropped by 3.7 percent.
Rising interests affect auto sector in two ways- first it increases the cost of production which results in reduced profitability and customers seeking auto loan to own the vehicle gets discouraged due to higher EMIs.

BSE Bankex fell by 3.1 percent.
Rising interest rates reduces banks credit growth along with shrinking NIM (Net interest margin).
Along with this RBI hiked the interest rate on saving accounts by 50 basis points to 4%. This shall bring more funds in banks saving account.
Despite this, investors are advised not to keep more than necessary funds in saving account as it shall earn negative returns after adjusting the inflation. Considering 6 percent annual inflation, yield on saving account comes to -2 percent.
Hike in saving rate shall make banks lending rates dearer, as 36% of Indian population have saving accounts. Many banks have made it clear that they shall pass the higher interest burden on customers.

Third sectoral index which took the hit was BSE Reality index dipped  2.9 percent.
Apart from raising construction costs higher real estate sales also gets hampered.
Home loan buyers defer their plan to purchase the property due to higher EMIs (or extended loan tenure) and continue with the present rental property.

IT index was the least affected by the credit policy as IT companies have very little debt in comparison with other sector companies.
First quarter review credit policy is due on July 26, 2011, where further monetary tightening could be done in order to curb the inflation.


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