Interest rate sensitive stocks, especially the public sector banks (PSBs) and non-bank finance companies (NBFCs) have rallied in the past few sessions on the hopes of a cut in key rates and easier liquidity conditions for banks under the prompt and corrective action (PCA) after Shaktikanta Das assumed charge of as the governor of the Reserve Bank of India (RBI).
Nifty PSU Bank, Nifty Auto, Nifty Realty and Nifty Finance Services indices were up between 5 per cent and 9 per cent from their respective Tuesday's low level, as compared to 4.6 per cent rise in the benchmark Nifty 50 index.
"On policy, it does appear that he (Shaktikanta Das) is likely to relax regulatory norms for banks (make them more countercyclical) and he will be more proactive in injecting liquidity. Focus on growth and his view that inflation remains benign confirms our view that he is more neutral to dovish on monetary policy, and supports our view of a reversal in the policy stance to 'neutral' in early 2019, followed by an actual rate cut in 2019," wrote Sonal Varma, managing director and chief India economist at Nomura in a co-authored report with Aurodeep Nandi.
Chart The case for a cut in rates has also been bolstered by a fall in consumer price inflation for November that came in at 2.33 per cent as compared to 3.38 per cent in October, led by a decline in food prices.
"We expect the RBI MPC to roll back at least 25 basis point (bp) of the 50bp rate hike in February or April. Growth is set to slow with tight liquidity aggravating base effects. Second, the RBI MPC's inflation risks are expectedly proving overdone," says Indranil Sen Gupta, India economist at Bank of America Merrill Lynch (BofAML).
These developments, analysts say, though augur well for rate sensitive stocks like banks and auto, investors need to be selective and should buy these stocks from a medium-to-long term perspective.
"The new RBI governor is likely to make some changes to the existing policies, which bodes well for banks, especially the ones under PCA. Bank of Baroda, Vijaya Bank and Indian Bank are the three stocks that I like," says G Chokkalingam, founder and managing director at Equinomics Research.
As regards autos, government's rural / farm push ahead of the general elections scheduled for 2019 augur well for the sector, especially the tractor and agri-related sub-segments, analysts say. However, a rise in crude oil and commodity prices, especially petrol and diesel continue to remain key concerns for the auto industry.
Analysts at CARE Ratings peg the sales growth in the tractor segment at 15 – 17 per cent in financial year 2018 – 19 (FY19); commercial vehicles at 25 – 30 per cent, passenger vehicles at 8 – 10 per cent and two-and-three wheelers at 17 – 19 per cent.
Saksham Kaushal, an analyst tracking the sector at Prabhudas Lilladher expects higher input costs to continue hurting the sector, albeit only in the near term.