The year 2026 has so far been a challenging one for Dalal Street bulls, with markets navigating multiple headwinds, including elevated crude oil prices, persistent selling by overseas investors, a record-low rupee, limited exposure to AI, and subdued domestic market drivers.
These headwinds have dragged the headline indices into double-digit losses, putting them on track for their first annual decline in a decade. Hopes of a recovery in the final quarter of the year have now weakened as the global interest-rate cycle has turned tighter, a development that could influence local equities through multiple channels.
The latest rate hikes by global central banks have put the Reserve Bank of India (RBI) in the spotlight, with expectations strengthening that the central bank could consider raising interest rates in its upcoming policy meeting as domestic inflation also moves above the target.
Global central banks turn hawkish amid rising inflation
Rising inflationary pressures, driven by the ongoing war in the Middle East, have prompted major central banks to raise interest rates in September and signal further monetary tightening if price pressures do not ease.
The ECB was the first major central bank to take action against rising inflation, raising rates by 25 basis points in September and taking its deposit rate to 2.50%, as inflation risks remained elevated. The US Federal Reserve followed with a 25-basis-point rate hike, taking the federal funds target range to 3.75–4.00% in a unanimous 12–0 decision.
This was the first-rate hike since July 2023, while another hike before the end of 2026 remains under consideration. The Bank of England held Bank Rate at 3.75% on September 17, but the 6–3 vote was notably hawkish, with three MPC members preferring a 25-basis-point hike to 4.0%.
The BoE also continues to reduce its government-bond holdings through quantitative tightening. The Bank of Japan raised its policy rate by 25 basis points to 1.25% on September 18, its highest level in 31 years, continuing its gradual exit from the ultra-low-rate regime.
Tighter global rates could influence RBI’s rate path
Motilal Oswal Financial Services said a tightening global interest-rate cycle could put additional pressure on Indian equities through higher bond yields, tighter financial conditions, and weaker foreign investor flows.
The brokerage noted that financial conditions in India are tightening even before a formal repo-rate hiking cycle begins, as liquidity absorption, higher domestic bond yields, and tighter global financial conditions raise the cost of capital for businesses and investors.
The impact could become more pronounced if elevated crude oil prices feed into domestic inflation. Motilal Oswal said food inflation is close to 6%, while WPI inflation is near 10%, and the recent oil shock could increasingly add to transportation and input costs while lifting inflation expectations.
The brokerage expects the combination of elevated food prices and energy pressures to push CPI inflation above 6% in the third quarter of FY27, potentially taking inflation beyond the RBI’s upper tolerance threshold.
If crude prices remain elevated and inflation expectations rise, Motilal Oswal said an October rate hike could become a meaningful possibility. Under a sustained oil-shock scenario, the brokerage sees potential for 75–100 basis points of cumulative rate hikes in the current cycle.
Such a shift would further tighten domestic financial conditions and could weigh on equity valuations, particularly in rate-sensitive and highly leveraged segments.
Global interest rates and RBI policy emerge as key risks for Indian stocks
If RBI considers a rate hike, the Indian stock market could face additional pressure, but the impact is unlikely to be uniform across sectors.
Motilal Oswal said banks could initially be relatively better positioned than NBFCs, as floating-rate assets can reprice, and stronger deposit franchises can provide some protection against higher funding costs.
NBFCs face greater exposure to wholesale funding and refinancing conditions. Real estate, autos, consumer durables, and highly leveraged businesses could face greater pressure from higher borrowing costs, while rural consumption could also be affected by elevated food inflation and weaker purchasing power.
Export-oriented sectors such as IT and pharma could receive some support from a weaker rupee, according to Motilal Oswal. However, the brokerage noted that IT companies remain exposed to slower global technology spending, which could limit the benefit from currency depreciation if tighter global financial conditions weigh on demand.
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