- The RBI raised the repo rate by 25 basis points to 5.50% in its first hike since February 2023
- The Monetary Policy Committee shifted to a calibrated tightening stance, focusing on inflation control
- Experts expect more rate hikes, with estimates ranging from 50 to 100 basis points in the cycle
The Reserve Bank of India (RBI) on Wednesday delivered its first repo rate hike since February 2023, raising the policy rate by 25 basis points to 5.50%. However, the bigger signal for markets was the Monetary Policy Committee's (MPC) decision to shift its stance to “calibrated tightening”, signalling that the central bank is now firmly focused on containing inflation and managing external risks.
The MPC unanimously backed the rate hike and indicated that future policy action would either be a further hike or a pause, effectively taking rate cuts off the table in the near term.
The shift has strengthened expectations that the RBI has entered a new rate-hike cycle. Economists broadly expect another hike in December, although views differ on the eventual magnitude.
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More rate hikes ahead?
Hitesh Suvarna, Economist at JM Financial, said the RBI's decision was driven more by the narrowing interest-rate differential between India and the US than by domestic growth concerns.
The depletion of nearly $38 billion in forex reserves in September, alongside a stronger US dollar and pressure on the rupee, made a front-loaded rate hike necessary, he said. Suvarna expects the rupee to move towards 97-97.5 per dollar and believes the rate-hike cycle could remain shallow, depending heavily on crude oil prices.
BofA expects the RBI to maintain a hawkish bias and has retained its call for 100 basis points of rate hikes in the current cycle.
Shriram Ramanathan, CIO – Fixed Income at HSBC Mutual Fund, expects another 50 bps of rate hikes over the next six months, although he said the trajectory will depend on global bond yields and geopolitical developments.
Purvi Mundhra, Economist - Deputy Vice President at Choice Institutional Equities said that while the 25-bps hike was expected, the shift to calibrated tightening is the real signal.
“The RBI has effectively started a hiking cycle it is reluctant to name, and we see a further 25 bps at each of the next two meetings. The deeper issue is the gap between how worried the RBI sounds and how little it has moved its numbers,” Mundhra said.
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Impact on equities
Analysts expect the policy shift to result in a valuation reset rather than an earnings collapse.
Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities, said the global cost of capital is undergoing a structural reset, with crude oil above $100 and the rupee near 96. Leveraged real estate, infrastructure and debt-heavy mid- and small-cap companies could face pressure, while CASA-rich banks may benefit as lending rates reprice faster than deposits.
Nirav Karkera, Head of Research and Fund Manager at W by Groww, said equities appear to be undergoing a cyclical correction rather than an earnings-driven downturn. He expects large caps to remain the core allocation, with selective exposure to mid- and small-caps.
Fixed-income outlook
The RBI's hawkish pivot is also likely to keep bond yields elevated. Yogesh Kalwani of InCred Wealth expects the 10-year G-Sec yield to move towards 7.4-7.5% and recommends avoiding duration until there is greater clarity on inflation and the terminal policy rate.
Instead, investors should prioritise accrual and carry strategies, with short-duration debt offering relatively lower sensitivity to further rate hikes.
Dinesh Ahuja, Head - Fixed Income, ASK Mutual Fund advises investors to consider liquid funds for short term liquidity requirements.
“For investors with a slightly longer-term horizon, 2-3 year (short term, corporate bind and PSU bond funds) point of the curve seems attractive from a risk reward perspective,” Ahuja said.
According to Vineet Agrawal, co-founder of Jiraaf, the approach for bond investors should be to stagger investments across maturities and issuers, keeping credit quality a priority.
“This helps investors lock in current yields while retaining flexibility to invest more if rates rise further,” he said.
Borrowers with floating-rate loans should check when their rates reset and prepare for higher EMIs or longer repayment periods. Those with surplus cash can consider partial prepayments to reduce interest costs, without dipping into their emergency saving, he added.
Overall, the RBI's message is clear: the easing cycle is over for now, and the next move is more likely to be a hike than a cut.
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