Interest rate Sensitive stocks to do well if RBI cuts rates

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The year 2011 has been a worst for investors. The worsening financial crisis took its toll on the stock markets.

The factors behind this loss are both domestic as well as global. The continous high inflation rate, ever-increasing interest rates, free falling rupee, slowdown in economic activity, low GDP growth, negative Index of Industrial Production (IIP) growth number, Euro zone crisis, downgrading of US credit rating... the list goes on.

In order to contain the inflationary pressures, the Reserve Bank of India (RBI) hiked its key rates 13 times during the last 20 months. The RBI has cut the GDP growth forecast for the current fiscal to 7.6 percent from eight percent as projected earlier.

All these have had a negative impact on the stock markets. They have impacted both the fundamentals as well as sentiment. The Sensex has been touching new lows during the year. The downsides have been more frequent and sharper as compared to the upsides during the year. So much so that many of the IPOs have flopped. Many IPOs in the pipeline have been shelved.

The foreign institutional investors (FIIs), the main drivers of the markets, turned negative on equity here last year. There was aggressive sell-offs by the FIIs during the year. Many blue-chip stocks touched a 52-week low during 2011.

With the year 2011 now behind us, the question is what can one expect in 2012? Will the trend continue or worsen. Or to be optimistic, will the good times come back again? Further, is this the right time to enter the markets? Have the markets bottomed out?

There are many blue-chip companies and value stocks at historic lows. You can follow a systemic approach to accumulate these stocks over the next few months. You would need to hold on to these stocks for some time for good returns though. A dramatic turnaround in the micro and macro factors is not expected.

There is nothing wrong with the fundamentals of these companies. It is the governing factors which are taking a toll on their valuations . For example, import dependent companies are losing heavily on account of exchange rate losses because of the rupee slide. Once the rupee stabilises, they will be back on track. Similarly, although the export-oriented companies are expected to benefit from the rupee erosion, they are losing because the export demand has eroded.

With the slower economic growth, the earnings of the corporate world is expected to fall further. This is also evident from the recent advance tax collections - it has not increased, indicating that corporates are not expecting a rosy picture in the immediate future.

Inflation is showing signs of moderating. The Wholesale Price Index (WPI) based inflation rate has come down from 9.73 percent in October 2011 to 9.1 percent in November 2011. Food inflation has come down to negative zone. With the growth slowing down and inflation showing signs of cooling off, the chances are that the RBI will start cutting key interest rates over the next few months. This will push the economy.

The global factors are also stabilising. The US unemployment data has improved. The Euro zone crisis may get a respite through bailouts and restructuring. However, as it is difficult to predict exactly when the market will actually bottom out, it is better that one develops a strategy to pick value stocks regularly. However, you should not be over aggressive. Patience is the key to good returns. It is of utmost importance that you also maintain a good debt mix in your portfolio.

In particular, you should track interest rate sensitive stocks - banking, realty, automobile etc. They have been severely affected by the interest rate hikes and will be the first to recover once the interest rates start reducing.