In India, in the last few days, banking as a sector has been severly underperforming. Many investors may wonder what is happening in this sector. Not only banks, but all CREDIT DEPENDENT industies are languishing in the past few weeks.
Here are a few logical reasons:
(1) Higher Interest rates means higher deposits collected by banks. And it also means higher lending rate to borrowers. While investing public will be happy to deposit money, lenders may not be that happy to borrow at higher cost. A 1% hike in interest rate may hit the profit of companies by as much as 3%. Hence Banks may be dumped with higher idle cash which donot earn them any return.
(2) The same is the case with Automobiles. Though companies like Ashok Leyland are bound to do well, higher interest rates would affect the sales of trucks and cars. As a result stock prices are down.
(3) After the LIC Housing Finance bribe case, Govt has asked all PSU banks to declare their NPA in real estate space. These figures are feared to affect the Q3 profit figures to be declared by Jan 15th.
(4) In general, Banks stocks along with automobiles stocks rally by the begining of a bull run. Later then decline. To understand more and appreciate about this cycle, do read the article on Sector Rotarion. Click Here.
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