RBI raises repo rate to 5.5% in first hike in four years, says no near-term cuts

RBI Governor Sanjay Malhotra stated that rate cuts in the near term are unlikely given prevailing economic conditions, indicating that the next policy action could be either a further hike or a pause, depending on how the economic outlook evolves.

Indian benchmark indices opened lower but recovered part of their losses during the session. The Sensex fell as much as 547 points, or 0.7%, to an intraday low of 72,520.73 before rebounding nearly 450 points to touch a high of 72,969.57. The Nifty 50 declined up to 198 points, or 0.8%, to a low of 22,578.25 before recovering 123 points to reach 22,701.60.

The Sensex eventually closed 0.58% lower at 72,644.63, while the BSE 500 showed weak breadth, reflecting market absorption of the shift in rate expectations.

Analysts noted that the RBI's projection of 6% inflation for the December quarter and the expectation that inflation will not return to the 4% target within the forecast horizon suggest a floor under the current policy rate for at least the next couple of quarters.

Harshal Dasani of INVasset PMS said the Governor’s comment that the next move can only be a hike or a pause removes the "hope trade" — the expectation that slowing growth might trigger cuts — meaning market multiples will now need support from earnings rather than liquidity.

Seema Srivastava of SMC Global Securities said the calibrated tightening could lead to near-term valuation compression and consolidation in the Sensex and Nifty, particularly affecting rate-sensitive sectors like banking, NBFCs, automobiles, and real estate due to higher borrowing costs.

However, she highlighted that the RBI has upwardly revised FY27 real GDP growth to 7.1%, indicating resilient domestic activity, which could act as a structural cushion against deeper market corrections.

Dasani pointed to the 2022 precedent, when the Nifty bottomed about six weeks after the first rate hike and later reached a record high despite ongoing tightening, suggesting that corporate earnings — not just the rate cycle — will be the key variable for equity performance going forward.

Both analysts agreed that in a higher-for-longer rate environment, companies with strong balance sheets, lower leverage, and the ability to grow earnings without heavy reliance on external borrowing may be favoured by investors.