RBI hikes interest rates by25 bps:What next for the markets?

The 25 basis point (bps) rate hike by the Reserve Bank of India (RBI) to 5.5 per cent is in line with expectations, said analysts, who expect the market’s focus to be back on crude oil prices in the backdrop of West Asia conflict, rupee-dollar equation, bond yields and how corporate earnings play out in the quarters ahead.

“The rate hike quantum was already priced in. The focus will be back on the geopolitical developments in West Asia and their impact on crude oil prices and corporate earnings. If oil stays above $100 a barrel (bbl) for long, it may see foreign investors continue to pull out of Indian equities, which in turn may put pressure on the rupee,” said G Chokkalingam, founder and head of research at Equinomics Research.

He expects, the markets to dip another 2 – 5 per cent from here on in a worst-case scenario. “I expect the RBI to stay on pause for some time to assess the situation before hiking again,” Chokkalingam added.

The Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) on Wednesday unanimously hiked the repo rate by 25 basis points to 5.5 per cent from 5.25 per cent. More importantly, MPC changed its stance from ‘neutral’ to ‘calibrated tightening’.

The RBI revised the Standing Deposit Facility (SDF) rate to 5.25 per cent, while the Marginal Standing Facility (MSF) rate and the bank rate were revised to 5.75 per cent.

The consumer price index (CPI)-based inflation forecast was also revised to 5.2 per cent from 4.8 per cent earlier, and raising the real gross domestic product (GDP) growth projection to 7.1 per cent, a rise of 40 bps from the earlier forecast.

“Continuing commodity prices pressures are likely to put upside pressure on inflation as growth remains resilient allowing quick pass-through of input prices to retail prices. The rising interest rate backdrop globally has also reduced RBI’s degrees of freedom. We see likelihood of another 50 bps hike this cycle,” said Garima Kapoor, deputy head of research and economist at Elara Capital.

The more important signal from here will be the RBI’s forward guidance, analysts said, and whether this hike of 25 bps marks the beginning of a broader tightening cycle.

For businesses and lenders alike, they believe, the ability to navigate the rate cycle with balance-sheet discipline will become increasingly important.

“For credit markets, the impact will extend beyond the immediate increase in borrowing costs. A higher-rate environment places greater emphasis on the quality of cash flows, debt-servicing capacity and the strength of the underlying security. For private credit, this reinforces the importance of disciplined underwriting and structuring, with greater selectivity around businesses that have sound fundamentals and clear visibility on repayment,” said Sandeep Agarwal, CEO & CIO, Modulus Alternatives.

The 25 bps hike and the revision in GDP projection and the inflation rate, according to U R Bhat, co-founder & director, Alphaniti Fintech, were in line with market’s expectation.

“The other institutions such as the World Bank etc. have also revised their GDP forecast for India. The RBI’s projections, therefore, brings all these projections in line with other forecasters. As long as the West Asia war continues, the markets will remain range-bound and will take cues from what other central banks do to curb inflation and measures to deal with high oil prices and elevated bond yields. Among sectors, I prefer defence, energy and segments of the IT space that deal with cybersecurity,” Bhat said.

Disclaimer: Moneywealth research provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.

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