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RBI policy: Auto, real estate, banking sectors gain

April 21, 2010 12:50 IST
Companies in rate-sensitive sectors heaved a sigh of relief as the Reserve Bank of India (RBI) limited the increase in policy rates to 25 basis points (bps).

While the BSE Reality index outperformed the Sensex with a 3.08 per cent gain, the auto index was higher at 1.19 per cent and the Bankex rose 1.53 per cent.

"Rate-sensitive sectors - such as real estate, automobile and banking - gained as there were apprehensions of the likely adverse impact had rates been increased by 50 basis points," says Rakesh Goyal, senior VP, Bonanza Portfolio.


Banks will now be allowed to classify their investments in non-SLR bonds issued by companies engaged in infrastructure activities under the category held-to-maturity (HTM). Such bonds were earlier subjected to mark-to-market requirements. With this move, banks can now subscribe to such long-term bonds issued for the long-term funding of the projects.

This would especially benefit companies engaged in BOT (build, operate, transfer) projects that require long-term funding for 15-20 years. Also, companies can now partly manage their long-term interest cost which, in an adverse situation, could have repercussions on the overall return on equity of the project.

"The marketability for such bonds will improve because banks will not have to make provision on mark-to-market and they can hold such instruments for a longer period. Also, once the demand for such instruments improve, the cost of interest might also come down," says Ashish Chandak, executive director, infrastructure banking, YES Bank.

Other measures in favour of the sector include treating the annuities received under a BOT road and highway project as tangible securities for bank lending. In addition, the infrastructure loan accounts classified as sub-standard will attract 5 per cent less provisioning at 15 per cent, helping infra companies to mop up more funds.


Two wheelers, which are not largely financed, remain unaffected. However, in the case of four wheelers and commercial vehicles – almost 70 sales are on credit basis – the impact could be on higher loan equated monthly instalments (EMIs).

Although banks are not going to increase interest rates immediately, analysts believe over the next three months, interest rates for automobiles should increase by 50-75 bps. In that case, analysts estimate commercial vehicles' EMIs will go up by 6-8 per cent.


A notional hike in policy rates in an environment of double-digit inflation helped bonds to rally initially. However, it might taper off as many experts suggest that yields are expected to inch up to around 8.4-8.5 per cent in the first half of 2010-11. This would affect treasury incomes of banks like UBI and Corporation Bank that typically hold higher proportion of 'available-for-sale' portfolio in their books.

Several banks effected an increase in term deposit rates by about 25-50 bps. This should increase cost pressures. However, banks would look at credit offtake numbers, which so far are showing signs of an improvement with demand coming back from corporate and retail segments.


Realty stocks gained as RBI made no changes to the risk weightage on loans to the commercial real estate sector. The increase in policy rates could have an impact on housing loans with a lag effect, feel analysts. Says Param Desai of Angel Securities: "While it is unlikely that there would be any impact in the short term, home loan rates may see an upward movement, to the tune of 25-50 bps, two quarters hence."

Experts, however, believe the impact on new or existing loans might not be substantial due to rising incomes. Realty companies will not be affected due to rising rates as most of the debt is long term in nature and cash flows on the back of an improving environment is strong enough to take care of short-term requirements.

Jitendra Kumar Gupta
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