Mumbai: Interest-rate sensitive stocks did well, but exchange-rate sensitive scrips took a beating on the Bombay Stock Exchange (BSE) on Tuesday after the central bank left its key policy rates unchanged, a decision that led to a rally in the stock market, with the benchmark index, Sensex, gaining 1.5%.
The divergent trends indicate that while the market believes the Reserve Bank of India (RBI) may succeed in controlling inflation, it isn’t as confident about the measures announced by the bank to prevent the rupee from appreciating. The Sensex closed 208.39 points up at 14,136.72, the highest level in two months, while the National Stock Exchange’s leading index, Nifty, was up 1.39% at 4,141.80.
Exchange-rate sensitive software stocks were the day’s major losers, with the BSE IT index being the only sectoral index that ended in the negative.
All leading software stocks were down on Tuesday, with Infosys Technologies Ltd down 0.45%, Tata Consultancy Services Ltd (TCS) by 1.63% and Wipro Technologies Ltd by 2.23%. Software stocks are sensitive to exchange rates as a large part of their earnings are in dollars. As the rupee appreciates, they earn less in rupees for each dollar of revenue.
Stocks in the interest rate-sensitive sectors—banking, real estate and automobiles—rallied the most. The BSE Bankex rose 4.06%, the highest gain among all sectoral indices, followed by the BSE Auto, which rose 1.65%. India’s largest commercial bank, the State Bank of India, rose 6.88% to close at Rs1,132.90 while ICICI Bank Ltd, the largest private bank, rose 3.65% to Rs950.25. HDFC Bank Ltd gained 2.65%, closing at Rs1,013.60. Among automobile stocks, the biggest gainer was Maruti Udyog Ltd, which went up by 3.52% to Rs794.40, followed by Tata Motors Ltd, up by 3.50% at Rs742.90.
Real-estate stocks, too, were big gainers. Unitech Ltd went up 9.07%, followed by Parsvnath Developers Ltd by 8.57%, Mahindra Gesco Developers Ltd by 7.19% and Ansal Properties and Infrastructure Ltd by 4.98%.
Banking, automobiles and real-estate stocks had suffered the most over the past two months as interest rates rose. With concerns of a further increase in interest rates easing, these sectors were the front runners in the current rally.
“We were expecting this situation and had been advising our clients to buy banking stocks. We believe interest rates will not go up further,” said Amitabh Chakraborty, president (equities), Religare Securities Ltd.
“With the Reserve Bank reducing the provisioning requirement for housing loans below Rs20 lakh, companies in the real-estate sector as well as banks, will benefit,” said Ranjit Kapadia, head of research, Prabhudas Lilladher.
Software stocks took a beating because the market believes that the appreciating local currency will dent the profitability of software companies, which earn mostly in dollars.
RBI on Tuesday announced a series of measures to rein in the rupee’s appreciation by allowing higher capital outflows in the form of higher overseas investments by corporations and mutual funds. However, the market seems to be sceptical about its ability to control the strengthening rupee.
“The rupee needs to be brought to the level of about 42 per dollar by the end of this year,” said Prashant Sawant, an economist with Anand Rathi Securities.
According to Chakraborty of Religare Securities, corporate earnings will drive the market. He also does not think the rise in interest rates will have any major impact on corporate earnings. “Indian companies are geared to take on the impact of interest rates. Most of them have managed to borrow at very low costs and a higher interest rate in the last quarter will not impact their bottom line much,” he said.