When stock markets head downwards, there is a desperate search for “feel good” news. Events and actions of no direct and immediate relevance to stock prices get blown out of proportion. So it was for the Reserve Bank of India’s quarterly review of credit policy on 29 January.

Shaken and stirred by FII outflows, global uncertainties and mayhem in the futures and options market, a section of market analysts had hoped that the RBI would cut interest rates to signal an end to the trend of rate hikes.

It is now merely academic to wonder if a cut would have boosted the inherent value of stocks. But what is beyond doubt is that it would have given some support to a market smothered by a string of negative developments. Notwithstanding the RBI inaction, at least a marginal rate cut is widely expected to take place in the next couple of months.

A step towards that was signalled by HDFC on 31 January, when India’s largest home finance company reduced the floating rate loan for its 9 lakh existing borrowers by 0.25 percentage points.

Slowing, but still high After peaking at 40% in 2006, annual growth in retail loans slowed to just below 30% in 2007

But how do you, as a stock or fund investor, stand to lose or gain for now? The most direct impact of interest rates on the value of shares is through earnings of the company. A fall in the rate means lower cost of borrowing, which particularly helps companies that are in the midst of massive expansion. Lower cost means better earnings and improved PE ratio. That said, most investment heavy sectors (i.e. infrastructure, power, telecom) continued to churn out good earnings growth even in the third quarter of 2007-8. Ditto for finance companies, which are most sensitive to interest rate movements.

Says Saumitra Chaudhury, economic adviser, ICRA: “Even if there is a profit squeeze in some sectors, it is because of a combination of other factors and not just interest rates.” Moreover, the expectation of a rate cut right now may not be based on seasonal movement in rates. Says Chanda Kochhar, joint managing director, ICICI Bank: “Normally, interest rates harden in the last quarter of the year. But compared to the fourth quarters in previous years, this year, interest rates have remained stable because of the comfortable liquidity.” The other big and booming sector to be directly impacted by interest rates is retail.

A higher cost of borrowing means lower capacity and willingness to buy on hire purchase. Already, part of auto sector slowdown is attributed to the spike in car loan rates in the past one year. Says Jnaneswar Sen, senior general manager (marketing), Honda: “Though the car market is still growing at 13-14%, it is a slowdown because it is lower than expectations. The current interest rates are definitely hurting demand in the car market and a rate cut would have helped.”

Profiting amidst rising costs What it costs banks to give home loans and how it affects their profitability • Cost of funds for housing finance companies have gone up, but so has their profitability due to increase in spread • Combination of these two has resulted in an increase in home loan rates

 Retail king Kishore Biyani, CEO, Future Group, has similar views: “Unchanged rates will affect consumption, especially in the retail sector.” He is among those who feel that consumer goods uptake will not be as robust as last year, which may put pressure on capacity expansion. But the mood in the housing loans and housing projects space is not gloomy. Says Shivkumar Mani, head (marketing), Dewan Housing: “Current interest rates, especially lending rates on home loans, do not hurt demand. Considering that a 50 basis point reduction in the rate has a mere 2% impact on the instalment due, it is inconsequential for most buyers.” Concurs Rajiv Singh, vicechairman, DLF: “We haven’t seen any fall in demand for our projects in the last quarter.”

Housing loans are long-term instruments, and can see a few interest rate cycles over their tenure. It’s important to recognise that a degree of uncertainty in rates is a given; it shouldn’t keep you from buying your home. Don’t forget, fundamentally the impact of interest rate on retail investors depends on whether a household is a net borrower or a net lender and what investments comprise the family’s portfolio.