RBI Monetary Policy: Interest rate-sensitive sectors were mixed on Wednesday, October 7, after the Reserve Bank of India’s Monetary Policy Committee (MPC) unanimously decided to raise the repo rate by 25 bps to 5.50% from 5.25%, marking the first rate hike in four years. The MPC also changed its stance to ‘calibrated tightening’.
The decision was already priced in by Dalal Street, with benchmark indices trimming losses following the announcement. The Sensex recovered around 450 points, or 0.6%, from the day’s low to hit an intraday high of 72,969.57, while the Nifty recovered 123 points, or 0.5%, to an intraday high of 22,701.6.
The recovery came after the RBI raised its real GDP growth forecast for FY27 by 40 basis points to 7.1%.
“Strong capacity utilisation, robust credit flows and the government’s thrust on infrastructure are expected to sustain investment activity. While services exports are expected to remain buoyant, bilateral trade agreements should boost merchandise exports,” the RBI said.
RBI Governor Sanjay Malhotra said that further rate cuts were off the table in the near term.
“The duration and extent of the rate hike cycle, therefore, would be contingent on the actual growth inflation development and outlook, especially that of underlying inflation, extent of broadening of price pressure, and speed round effects on the supply shock,” he said.
Banks and financials lead the charge
Banking and financial stocks moved higher after Governor Malhotra said the banking sector remained strong, with scheduled commercial banks maintaining healthy capital adequacy, liquidity, asset quality and profitability. He also said the financial health of non-banking financial companies (NBFCs) remained sound.
Amid rapidly changing financial market conditions, the RBI plans to establish a technical consultative committee for financial markets. Malhotra also said, “We are now allowing the interoperability amongst these NBFC account aggregators.”
The Nifty Bank gained 0.3%, while the Nifty Financial Services index rose 0.2%. The Nifty PSU Bank and Nifty Private Bank indices advanced 0.8% and 0.4%, respectively.
Within the Nifty Bank index, Punjab National Bank and Union Bank were the top performers, rising around 3% each. Kotak Bank, Federal Bank and Canara Bank gained more than 1.5% each, while Bank of Baroda, Axis Bank and ICICI Bank advanced around 0.5% each. Yes Bank, HDFC Bank, AU Bank, IDFC Bank and IndusInd Bank, however, declined between 0.5% and 2%.
The financial services segment also saw buying interest. PFC surged around 2%, making it the top gainer, while Bajaj Finance and LIC Housing gained more than 1% each. HDFC Life rose 0.5%. On the other hand, Shriram Finance declined 2%, MFSL fell 1.5%, ICICI General Insurance declined 1%, SBI Life and SBI Card fell 1% each, and Chola Finance declined 0.5%.
The auto sector declined more than 1%. TI India, Ashok Leyland, Bajaj Auto and Hyundai fell more than 2%, while Hero Moto, Bharat Forge, Maruti, M&M and Bosch declined more than 1%. TVS Motor, Tata Motors PV and Wicher also traded in the red.
Realty stocks were also under pressure, with almost all stocks in the index declining except two. ABREL, Brigade, Prestige, DLF, Godrej and Lodha fell more than 1% each, while Sobha and Anant Raj were the only notable gainers.
Where should you invest?
The RBI’s 25-basis-point rate hike makes stock selection more important. With the benefit of falling rates fading, experts favour businesses that can continue growing earnings despite higher borrowing costs. Large private banks, companies with strong pricing power, clean balance sheets and low dependence on external funding emerge as the preferred pockets.
Rishabh Nahar, Partner and Fund Manager at Qode Advisors, said investors should focus on companies capable of genuine earnings compounding rather than those benefiting primarily from liquidity and lower valuations.
“The easy valuation tailwind from lower rates is beginning to fade, and earnings will increasingly have to justify valuations. The market should reward genuine earnings compounding and pricing power rather than broad-based liquidity-driven expansion.”
Within financials, larger private banks could be better placed. Dnyanada Vaidya, Research Analyst – BFSI at Axis Direct, said credit growth remained strong and asset quality resilient, although margins could face near-term pressure from excess liquidity and lower-spread lending. He expects the margin outlook to improve in the second half.
“Outlook for NIMs turns constructive for H2, with rate hikes reflecting in EBLR-linked portfolios of banks. We believe private banks especially larger private banks would be bigger beneficiaries. Asset Quality remains in a sweet spot.”
Beyond banking, Aditya Agarwala, Co-Founder and CIO at InvestValue Capital, said investors should avoid highly leveraged and rate-sensitive businesses and instead favour companies capable of funding their own growth.
“A 7%+ growth economy still supports earnings. We would stay focused on businesses with pricing power, clean balance sheets and the ability to fund growth internally. In a rising-rate phase, quality tends to compound while leverage gets exposed.”
Overall, the experts’ preference is clear—large private banks and high-quality, low-leverage companies with pricing power and strong earnings visibility, rather than highly leveraged, rate-sensitive businesses.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
