Stocks in select sectors, where financing plays a key role, surged today on the back of a cut in bank rate by 25 basis points by RBI on Tuesday.
Most two-wheeler shares firmed up - Bajaj Auto (up 2.5% to Rs 492.50), Hero Honda Motors (up 2.2% to Rs 200.80) and TVS Motors (up 2.1% to Rs 410).
Tractors major Mahindra & Mahindra edged up 1% to Rs 110.
Shares of housing finance major HDFC climbed 2.9% to Rs 321, with the scirp rallying for the second day in a row on Tuesday. LIC Housing Finance rose 1.9% to Rs 80.50.
The surge in these stocks was prompted by a cut in bank rate to 6% from 6.25 by RBI in its Credit Policy for 2003-04 announced today. The bank rate is viewed as a key interest rate signal. Already interest rates are southward bound and, with today's cut in bank rate, these have reached historic lows. RBI, however, said that bank rate should hold steady till the mid-year review of monetary policy in October 2003. The latest rate in bank cut however was lower than expectations of a cut of 50 basis points.
Interest rates are vital for some of sectors like tractors where the majority of sales takes place through financing. Similarly, the growth in the housing finance sector has been fueled in the last couple of years by the sharp fall in interest rates.
The low interest rates financial option has helped the two-wheeler sector over the years as well. The two-wheeler sector is currently witnessing intense competition and the high growth rates in terms of motorcycle sales have slowed down in recent months.
As far as the tractor industry is concerned, the industry is going through difficult times due to sluggish demand that has resulted into a surge in inventories at dealers. The poor monsoon last year hit the industry very hard.
The low interest rate regime as well as tax sops has fuelled strong demand for housing loans even as competition is intensifying with banks becoming aggressive in the housing finance segment. Interest rates on housing finance loans have plunged to 9-10% as of now from 13-14% about two years back and from a level of as much as 18% a few years ago.
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