Why did some stocks react to RBI’s decision to keep the interest rate?
In the wake of the RBI’s monetary policy announcement on 7 April, the stocks that were held up were mainly one category, broadly referred to as interest rate sensitivity.
Investors bet that these firms stand to gain from the decision of the central bank.
Why are these stocks called interest rate sensitivity?
Prevailing interest rates can set the pace of sales growth in specific areas. When the benchmark interest rates change, the fortunes of these regions are affected. This shows their stock prices.
Which areas are most sensitive to rate changes?
Firms whose products are mostly purchased using financing options as well as providers of credit are most directly and immediately affected by the rate move.
While housing and real estate firms and automakers rely too much on the availability of inexpensive credit to fund their customers’ purchases, banks, non-banking financial companies and housing finance firms whenever the cost of credit falls or rises. is.
How do these shares react?
As share prices are an indication of the future profits of firms, stocks of banks, auto firms and companies servicing the housing sector respond quickly to such announcements. When the RBI raises the benchmark rates, it may mean that lending institutions will have to increase their lending rates. They have to pay a higher rate when borrowing from the central bank.
This means that the rate of home loans and auto loans will increase for retail borrowers, potentially reducing the eagerness among buyers to purchase these products.
When the RBI lowers the rates, the borrowers have to pay a lower rate than before for the price of the same product.
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