Explained: How RBI rate hike may impact Sensex, Nifty after 8-week losing streak

RBI Governor Sanjay Malhotra is likely to announce the MPC’s decision to hike rates tomorrow, but analysts believe that the stock market may not be sharply impacted by it after the recent selloff as the hike has already been priced in.

The Reserve Bank of India (RBI) is holding its Monetary Policy Committee (MPC) meeting from October 5 to October 7. This marks the Indian central bank's first such meeting after the US Federal Reserve increased rates last month. Analysts expect Sanjay Malhotra to announce a 25-basis point hike tomorrow, marking RBI's first rate increase in nearly four years.

Also read |Markets bet on RBI rate hike as inflation pressure builds


While markets are pricing in steep rate hikes of 125 basis points by RBI in the next one year, Nomura recently suggested that this cycle is fundamentally different and expects policy fine-tuning instead, with the international brokerage seeing a higher chance of a cumulative 50 bps rate hike over the next one year.

RBI’s policy dilemma

Amid the challenging macro environment due to high crude oil price and soaring bond yields, RBI’s MPC faces a difficult trade-off between frontloading rate hikes versus risking imported inflation, JM Financial said in the recent report. A rate hike would mean a departure from RBI dovish signals even as the domestic growth-inflation dynamics do not warrant rate hikes.

The narrowing yield differential meanwhile will increase the cost of maintaining status quo, while the combination of excess liquidity and rate hike would be appropriate to partially offset growth sacrifice and prevent imported inflationary pressures, it added. “It will be a tough call for the RBI to choose between frontloading a rate hike in October 2026 versus risking imported inflation; we expect a shallow rate hike cycle starting October 2026,” the domestic brokerage said.

Also read | Will RBI rate hikes intensify selloff in bank stocks? Analysts explain why fears may be overdone

How markets may react to RBI rate hike?

Markets overall expect the RBI to hike policy rates in response to the global rate hike cycle even as the domestic growth-inflation dynamics do not warrant an immediate rate hike at this juncture, JM Financial noted.

The RBI will likely increase its rates by 25 basis points tomorrow, said VK Vijayakumar, Chief Investment Strategist at Geojit Investments. He however highlighted that the market has already largely discounted this. "Banks will benefit from the rate hike since rising floating rates will improve their margins," according to the analyst.

Vaqarjaved Khan, Senior Fundamental analyst at Angel One, also said that the potential 25 basis points repo rate hike by RBI tomorrow has already been priced into domestic equities, following recent inflation prints and global yield movements. Stock markets rarely react violently to well telegraphed policy decisions. Instead, medium-term market trajectories remain firmly anchored to corporate earnings growth, operating margins, and fundamental execution, the analyst said.

Not rate hike but guidance is what the stock market is really waiting for, said Tanvi Kanchan, Associate Director at Anand Rathi Shares & Stock Brokers. “If the RBI keeps its stance neutral and frames this as a pre-emptive move against imported inflation, markets can live with it. A shift in stance that signals a cycle would be a different conversation,” the analyst said.

The bigger point is that the RBI isn't what's driving this market. Eight straight weeks of losses have come from forces outside India's control, with US 10-year yields above 5.25%, Brent back above $100, and a rupee near 96 to the dollar, Kanchan pointed out. Those three are what keep foreign investors selling, and a domestic rate hike doesn't change any of them. If anything, a hike that defends the rupee could slow the outflows at the margin. “The real support has come from domestic investors, who have almost fully absorbed foreign selling. That's the cushion that keeps a rate decision from turning into a sell-off.”

Also read |RBI likely to hike repo rate by 25 bps to 5.50% in October policy: ET Poll

What should investors do if RBI hikes rates?

At the sector level, rate-sensitive pockets like real estate, autos and consumer durables will feel higher borrowing costs, while IT exporters gain from a weaker rupee, Tanvi Kanchan said. Khan from Angel One meanwhile said that although rate-sensitive sectors like real estate and auto could see temporary sentiment volatility during peak festive demand, balance sheets across corporate India remain far cleaner today than in prior tightening cycles. For the banking sector, the analytical focus shifts from rapid loan growth to net interest margin defense as deposit repricing catches up, he added.

Equity investors should look beyond the policy rate move itself. The true market driver will be the MPC’s forward stance on systemic liquidity and the terminal rate path, the Angel One analyst said, concluding that earnings durability, not monetary policy fine-tuning, will ultimately dictate stock market directions. Tanvi Kanchan highlighted that for investors, this is not the time to make big calls on one policy meeting, as energy prices and the currency will set the direction for Indian equities.

This comes after the Sensex and Nifty logged losses for eight consecutive weeks, surpassing the streaks seen during the 2020 Covid-19 crash and the 2008 global financial crisis. Sensex plunged 6,590 points over the past eight weeks, while the Nifty has lost 2,149 points. The selloff wiped out more than Rs 26 lakh crore from the BSE’s total market capitalisation, dragging it below Rs 467 lakh crore.

Also read | Market crash wipes out Rs 26 lakh cr in 8 weeks! Why soaring bond yields may hurt Sensex, Nifty more than elevated oil prices

Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.