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Wednesday, June 25, 2008

With interest rates set to rise - real estate, automobile and consumer durable companies to see their sales dropping in the coming days

Banks will also be hit as higher interest rates lead to lower credit growth, and in turn impact their bottom line.
This will keep investors away from these sectors.

Late Tuesday, Reserve Bank of India stepped its war against inflation by raising the cash reserve ratio and repo rate by 50 basis points each, just a day after Governor YV Reddy gave all indications to the contrary.

The RBI raised its key lending rate by 50 basis points to 8.5 per cent with immediate effect, the highest since March 2002 and the second hike this month. It also increased the cash reserve ratio to 8.75 per cent from 8.25 per cent in two stages, on July 5 and July 19.

With every successive rate hike, the whole credit growth paradigm is shifting downward. In turn, housing loans, consumer loans, and all interest rate sensitive sectors will face the heat, say marketmen.

The real estate sector faces a double blow:

Decrease in demand is likely owing to higher borrowing costs, and because of higher cost of construction, the cost of funds will increase.
Tough road ahead for interest rate sensitive sectors-The Economic Times

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