RBI hike reinforces stock selection, not broad equity caution: Ajit Mishra

Disclaimer: This article is written by Ajit Mishra, SVP Research, Religare Broking. Views expressed are his own. Readers' discretion is advised.

 

The Reserve Bank of India’s decision to raise the repo rate by 25 basis points to 5.50 per cent marks an important shift in the monetary policy cycle. While the rate hike was broadly anticipated, the more significant signal, in our view, is the change in the policy stance from neutral to calibrated tightening. The rate hike was supported unanimously by the six-member Monetary Policy Committee, while the change in stance was approved by a 4–2 majority. The shift indicates that the RBI is becoming more vigilant about inflation risks and is prepared to respond proactively if price pressures persist.

 

 

The rationale is understandable. CPI inflation rose to 4.82 per cent in August, remaining above the RBI’s 4 per cent medium-term target for the third consecutive month. More importantly, inflation risks are increasingly being influenced by multiple factors. Elevated crude oil prices, geopolitical tensions, weather-related disruptions and a weaker rupee could add to input costs and imported inflation. Against this backdrop, the RBI has raised its FY27 inflation forecast to 5.2 per cent from 5.0 per cent earlier, signalling greater caution around the inflation trajectory.

 

At the same time, the RBI is not tightening policy against a backdrop of weakening economic activity. India’s real GDP growth accelerated to 7.8 per cent in Q1 FY27, ahead of the central bank’s earlier projection of 7 per cent, prompting it to raise its full-year FY27 growth forecast to 7.1 per cent from 6.7 per cent. The combination of resilient growth and elevated inflation gives the RBI greater flexibility to prioritise price stability without materially compromising the growth outlook.

In our view, this is less about restraining an overheating economy and more about preventing a temporary inflation shock from becoming persistent or creating second-round effects. The shift in stance therefore represents a change in the risk balance rather than the beginning of an aggressive tightening cycle. Check - TOP GAINERS NSE | TOP LOSERS NSE

 

For financial markets, the direction of policy is likely to matter more than the immediate 25 bps hike. The calibrated-tightening stance keeps the possibility of further rate action open, although the RBI is likely to remain data-dependent. Bond yields could remain sensitive to inflation expectations, crude prices and global interest rates. In equities, rate-sensitive segments such as real estate, autos and parts of the consumption space may face some pressure if the tightening cycle extends.

 

However, this does not necessarily imply a broad-based negative outlook for equities. Companies with strong balance sheets, pricing power, resilient cash flows and better earnings visibility should remain relatively better positioned.

 

Going ahead, crude oil prices, food inflation, the rupee and global monetary conditions will be the key variables to watch. If these pressures moderate, the tightening cycle could remain shallow. However, sustained inflationary pressure could increase the probability of further rate hikes.

 

For investors, the latest policy reinforces the importance of stock selection, valuation discipline and earnings visibility, rather than relying on a broad-based liquidity-driven market rally.