The Reserve Bank of India (RBI) has shifted its policy stance towards calibrated tightening, signalling that controlling inflation will be the key priority even as the domestic economy continues to show resilience.
According to Sachin Sawrikar, Managing Partner, Artha Bharat Investment Managers IFSC LLP, the RBI has raised its FY27 growth forecast to 7.1 per cent and increased its inflation projection to 5.2 per cent. At the same time, the central bank unanimously raised the repo rate by 25 basis points to 5.50 per cent, marking its first rate hike since February 2023.
The change in stance from neutral to calibrated tightening effectively brings the easing cycle of 2025 to an end. Sawrikar said the RBI Governor has made it clear that the next policy move would either be a rate hike or a pause, indicating that the central bank is unlikely to resume monetary easing in the near term.
With the repo rate now only around 30 basis points above the projected inflation rate, further rate hikes could remain on the table if inflationary pressures persist. However, the use of the term “calibrated” suggests that any future tightening is likely to be measured and dependent on incoming economic data.
Preference for Short-End Bonds
For fixed-income investors, Sawrikar said the current environment favours high-quality bonds at the shorter end of the yield curve.
Such investments can offer a combination of accrual income and relatively lower duration risk, while also giving investors the flexibility to reinvest as bond yields adjust to the evolving interest-rate cycle.
Equities Face a Mixed Rate Environment
The RBI’s decision also has implications for equity markets. While economic growth of above 7 per cent provides a supportive backdrop for equities, higher borrowing costs are likely to affect companies differently.
According to Sawrikar, companies with strong pricing power, resilient earnings and healthy balance sheets are likely to be better positioned in the changing interest-rate environment.
As the rate cycle turns, he believes that earnings delivery and valuation discipline will become increasingly important in determining equity returns.
The RBI’s latest move therefore marks a significant shift in the monetary policy environment — with growth remaining robust, but inflation control once again taking centre stage.
