Mumbai: Stocks of banks and real estate firms, sensitive to interest rate cycles by the nature of their business, staged a strong rally on Tuesday, in the hope that the low interest rate regime will help increase demand for loans and property.
After a meeting with the chief executives of the public sector banks on Tuesday, finance minister P. Chidambaram said the banks had assured him that they would consider lowering interest rates. Finance secretary Arun Ramanathan has called a meeting of private and foreign banks on Wednesday.
At Tuesday’s meeting, the bank chiefs assured the finance minister that credit flow to productive sectors would continue and that they would cut the price of bank loan by between 50 and 75 basis points over the next few days. One basis point is one hundredth of a percentage point.
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On Saturday, the Reserve Bank of India, or RBI, took a series of aggressive monetary measures to enhance liquidity. It also cut the policy rate. Since then, investors have been rushing to buy both bank and real estate stocks in the market, expecting commercial banks to ease lending rates.
Orbit Corp. Ltd, the Delhi-based developer, saw the biggest leap with its stock rising 45.48% over the past two days. Shares of the country’s largest real estate firm DLF Ltd gained around 32%.
Stocks of Peninsula Land Ltd, Parsvnath Developers Ltd and Ansal Properties and Infrastructure Ltd, rose by at least 20%, while Indiabulls Real Estate Ltd gained around 20%.
If the banks cut rates, the borrowing cost of firms and individuals will go down, fuelling demand for houses. The cost of a home loan has gone up by a third in the past few months and this has reduced demand for homes.
The signal is more than clear that RBI “will continue to adopt further monetary easing on a continuous basis as and when felt necessary,” said a research report by local brokerage Edelweiss Capital Ltd.
Among bank stocks, Kotak Mahindra Bank Ltd was the biggest gainer, up at least 25%, in two trading sessions this week. Shares of Yes Bank Ltd gained around 24% and State Bank of India, the country’s biggest lender, around 19%. About a dozen other bank stocks including Union Bank of India, Bank of Baroda, Punjab National Bank and ICICI Bank Ltd, the country’s largest private sector lender, gained in excess of 10%.
Apart from higher credit growth, banks gain in a low interest regime from bond trading as prices of bonds go up and yields drop. When interest rates rise, banks book mark to market, or MTM, losses on their bond portfolio and this pulls down their profits. MTM is an accounting practice of valuing an asset in accordance with its market price and not the acquisition price. Bond prices and yields move in opposite directions.
Domestic brokerage Motilal Oswal Financial Services Ltd, said that it prefers banks “with strong liability franchisee and having low delinquency risks”.
Large stocks in the banking and real estate sector were beaten down the most during the sharp slump in the Bombay Stock Exchange’s benchmark index Sensex, which dropped from 21,000 levels in January to below 8,000 in mid-October.
Sensex closed at 10,631, up 293 points on Tuesday’s trade. “Realty and banking stocks provided the requisite support to the Sensex,” said the post market commentary by local brokerage Sharekhan Ltd.
Despite the strong monetary measures by the central bank, a stress-case scenario—where liquidity conditions will remain tight, interest rates will remain high and bank lending is likely to slow—could still exist, said Tuesday’s strategy report by India Infoline Ltd’s institutional desk.
Apart from brokerages, fund managers are also sceptical about smooth credit off-take and growth for banks and real estate firms. “It’s too early to say whether one swallow makes a summer,” said Waqar Naqvi, chief executive of Taurus Asset Management Co. Ltd.
Graphics by Sandeep Bhatnagar / Mint
Ashwin Ramarathinam and Ravi Krishnan contributed to this story.