The RBI Governor, D. Subbarao announced a steep 50 basis points hike in key short-term rates on Tuesday, as the central bank stepped up its fight against the inflation beast. The latest monetary tightening by the RBI reflects a change from its previous stance of taking a calibrated approach to rate hikes.
In the process, the RBI has sent out a clear signal that it is willing to sacrifice economic growth in the short term to ensure that the growth momentum in the medium term is not adversely affected by inflation.
Although the markets were fearing a more hawkish policy from the RBI, the 50 bps rate hike still rattled the street, with rate sensitive sectors like Banking, Auto and Realty taking a pounding.
For the Automobile sector, the rising interest rates mean direct impact on their sales as loans for purchasing vehicles will turn dearer. The BSE Auto Index is the top loser today.
For the Banking sector, the hardening of interest rates means pressure on margins and possible slowdown in the growth of advances. The 50 bps hike in the savings bank deposits will also result in a marginal increase in the cost of funds.
In addition, the revised provisioning norms for certain categories of NPAs and restructured loans will also hit net interest margins (NIMs). So, banks and auto companies will have a tough time navigating the coming months and quarters given that the high interest rate scenario is here to stay for a while.
Not only that, the whole India Inc. could see a squeeze on their bottomline from the higher borrowing costs on the one hand and spiraling commodity prices on the other.