Generally, the sectors like banks, automobile, housing finance, real estate, metals, etc. react to rate changes whenever RBI reviews the rates every two months. Recent RBI monetary policy unchanged the repo rate and kept it at 4%. The rising Repo Rate slows down the economic growth and is unfavourable to the markets. Usually, a low-interest rate causes high inflation, and a high interest rate brings down inflation. Countries like Brazil, Russia, Turkey are facing high inflation, raised interest rates recently.
As inflation is globally interconnected and in India, Petrol Diesel prices crossing Rs 100 and Palm oil prices more than doubled, surely inflation will shoot up in coming months so RBI has to increase interest rate which is inevitable.
To get a better understanding of Interest rate cycles, we have taken the Spread of the 10-year bond Yield Rate and 3 Month Treasury Rate and compared them with Bank Nifty Returns. To find out how the bank index is reacting to Interest rate spread, which may not be a perfect indicator as it shows some misleading whipsaws. We can have a long term prediction approximately.
In this Chart, the Interest rate spread is compared with Bank Nifty in which it is difficult to find the cyclical movements of the Bank Nifty. So we normalized the BANKNIFTY values in the chart shown below.
The chart is showing Interest rate spread and Bank Nifty Prices are Normalized to find the cyclical movements. Peaks and Troughs are not exactly matched due to averaging but clearly showing if Interest rate spread is increasing Bank Nifty returns decreasing and vice versa.
Presently interest rates are due for an increase, Banking sector is in Negative Bias and showing that Banking Sector follows Interest rate cycles based on back-testing. Expect Bank Nifty moves in coming weeks with negatively skewed. We can compare other sectors also with Interest rate spread to find which are positively biased or negatively biased.
Add Chart to Comment
We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:
- Enrich the conversation
- Stay focused and on track. Only post material that’s relevant to the topic being discussed.
- Be respectful. Even negative opinions can be framed positively and diplomatically.
- Use standard writing style. Include punctuation and upper and lower cases.
- NOTE: Spam and/or promotional messages and links within a comment will be removed
- Avoid profanity, slander or personal attacks directed at an author or another user.
- Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
- Only English comments will be allowed.
Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.