Major global central banks have embarked on a path of monetary tightening, and the Reserve Bank of India (RBI) now looks set to follow suit.
After interest rate hikes by the US Federal Reserve, the Bank of Japan (BoJ), and the European Central Bank (ECB), the RBI, too, may increase the repo rate by 25 basis points next week on 7 October.
In August, the RBI Governor Sanjay Malhotra-led Monetary Policy Committee (MPC) maintained a status quo on benchmark interest rates and maintained a ‘neutral’ policy stance.
The RBI has been maintaining the repo rate steady at 5.25% since December last year, when it cut the interest rate by 25 basis points.
If the central bank decides to increase the rate, it will be the first rate hike since February 2023, when it raised rates by 25 basis points.
Why can the RBI raise the rate?
The combo of rising inflation and resilient economy is what the central bank needs to bite the bullet and lift rates.
India’s retail inflation rose to a 20-month high of 4.82% in August, above the central bank’s 4% target midpoint for the third consecutive month since January 2025.
On the other hand, India’s GDP grew by of 7.8% in the first quarter of FY27, while factory output, measured by the Index of Industrial Production (IIP), rose to 8% in August.
While inflation is still within the target band of 4-6%, higher oil prices due to the still unresolved US-Iran conflict and weak monsoon are the factors that can fuel inflation going forward.
Moreover, globally, the rate cycle is turning, and the RBI would not want to fall behind the curve.
“After holding through 2026, the RBI faces growing pressure to raise rates at its October review, and a 25 basis point hike to 5.50% is now a real possibility, which would be the first increase since early 2023,” Rajeev Sharan, Head of Research, Brickwork Ratings, noted.
“The case for moving higher has strengthened: retail inflation has climbed to 4.82% and is set to peak around the festive quarter, crude is holding above $100, the rupee has slipped past 96, and the Fed’s recent hike has narrowed the rate gap and added to currency pressure,” Sharan explained.
What should be your equity-debt strategy after a potential rate hike?
A 25 bps hike is largely discounted, so it may not have any significant impact on market sentiment.
At this juncture, experts do not recommend trimming exposure to equities. However, they can consider short-term debt funds.
“There is a high probability of a 25bp rate hike next week. This has become almost inevitable amid rising prices and central banks like the Fed turning hawkish. Reducing equities in the portfolio is not necessary, since equities in segments like banking will benefit when floating rates rise. Investors with a 3-year time horizon can add short-duration debt funds to their portfolio,” said V K Vijayakumar, Chief Investment Strategist, Geojit Investments.
According to G Chokkalingam, the founder and head of research at Equinomics Research, it is quite late to reduce equity exposure as Nifty has already declined by 15% from a 2-year high.
“After a steep correction, the valuation of the Nifty and the Sensex has turned attractive. Also, the market has already largely discounted a spike in oil prices and a monsoon failure. So, one should remain invested and buy the dips,” said Chokkalingam.
Devender Singhal, Senior Fund Manager, Kotak Mutual Fund, suggests looking at financials, industrials, defence, capital goods and select consumption segments as he believes market leadership may come from these sectors.
“While global growth, crude prices and geopolitical developments remain key risks, the earnings outlook appears more balanced than it did at the start of the fiscal year. As a result, the second half of the financial year could mark a transition from earnings disappointment to earnings delivery, providing a firmer foundation for equity market returns,” said Singhal.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
