Addressing the immediate impact of the policy, Agarwal noted that two to three rate hikes will be margin accretive for banks in the near term. “Any rate hikes in the near term immediately filter into the lending rate while it filters into the deposit costs only with a lag,” he explained.
This dynamic could reverse the margin pressures witnessed in the previous quarter, where banks reported credit growth in the 17 to 20% range but struggled with profitability. However, he does not anticipate significant earnings upgrades, noting that analysts are already reasonably bullish on banking estimates.
The outlook darkens if the rate hike cycle extends further. Agarwal warned that four hikes could derail multiple sectors, including real estate and consumer discretionary demand, while severely impacting credit growth. He pointed out that credit growth had fallen to the 10 to 11% range just three quarters ago before rebounding to the 16 to 18% bracket recently.
“Four rate hikes, if it happens, could seriously derail the overall growth outlook and hence the entire market,” Agarwal said, adding that such a scenario might coincide with US 10-year yields crossing 6%, triggering a global risk-off trade.
Assuming the central bank stops at three hikes, Agarwal believes the market will avoid structural damage, though it may experience a slight bit of stress.
For real estate, he observed a mixed demand trajectory across different micro-markets, noting it is no longer as uniformly strong as it was a year to a year and a half ago.
In the automobile sector, he argued that the primary concern is not interest rates but whether volume numbers can sustain once the goods and services tax (GST) stimulus impact wears off in the December quarter. Additionally, he is monitoring how oil prices will filter into margin pressures, which typically occurs with a one-to-one-and-a-half-quarter lag.
Beyond rate-sensitive sectors, Agarwal expressed a clear preference for discretionary consumption stocks over staples. He highlighted that staples are already highly penetrated and are losing their historical distribution advantage to new direct-to-consumer internet brands.
Consumers in small towns can now purchase these brands online without companies needing to replicate the massive distribution networks of giants like Unilever or Nestle. “I would actually opt for discretionary over staples any day,” Agarwal concluded, citing the sector’s superior competitive positioning and relatively better demand growth.
For the full interview, watch the accompanying video
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