RBI's Monetary Policy Committee (MPC) decided to cut the repo rate by 25 basis points from 6.50% to 6.25% last week. I discussed the main reason why RBI did that in my article last week. The global economic situation has worsened over the last few days, with the European Commission cutting its growth forecast for Euro Zone. The ongoing US-China trade war and growing concerns from Brexit are likely to dent global economic growth.
Since RBI is focusing on growth-related issues that India could encounter from global headwinds, the likelihood of RBI cutting interest rates during its next meeting in April increases further. There is a good possibility that RBI will cut interest rates by another 25 basis points in the next couple of months. Hence, in this declining interest rate scenario, I will discuss here what sectors look good from an investment point of view.
The most obvious sector that comes to my mind that should benefit is the interest rate sensitive sectors such as Real Estate and Automobile. In the declining interest rate scenario, buying Real Estate become more affordable as your EMIs come down. EMIs make up for a chunk of household expenditure for a salaried class. As an example, if you had taken a housing loan of Rs. 30 lakhs for a tenure of 20 years at a home loan interest rate of 9%, your EMI would be Rs. 26,992. However, in the scenario where your bank reduces the home loan rate by 0.5%, your EMI will come down to Rs. 26,035. That is a cool savings of Rs. 957 per month.
There is also talk of lowering GST rates for the housing sector, which will a further boost to the sector.
Similarly, you will need to pay lower EMIs on your auto loan. Along with lower crude prices, lower interest rates should boost the auto sector. Auto sector badly needed some help and it duly came in the form of interest rate cuts from RBI. Maruti Suzuki India Ltd. (NS:MRTI), the market leader in the car segment has been suffering from a decline in net profits over the last few quarters. I discussed this aspect in my article on Maruti a few days back.
The lower interest rate scenario helps consumers have more money in their hand. This along with some of the consumer-benefiting proposals that the government announced during the recent union budget are likely to increase disposable income for consumers. This should directly help companies with a domestic consumption theme as consumers are more likely to make purchases of the products that they hold-off making during a high-interest rate scenario.
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