India’s equity market is likely to remain cautious after the RBI shifted its stance from ‘neutral’ to ‘calibrated tightening’, signalling room for further rate hikes as inflationary pressures build amid the West Asia crisis.
“While the rate hike was largely anticipated, the change in stance was unexpected and triggered a negative market reaction. The RBI also raised its FY27 GDP growth forecast by 40bp to 7.1% from 6.7%, while increasing its FY27 CPI inflation forecast to 5.2% from 5.0%, pointing to stronger growth but a higher inflation trajectory,” said Siddhartha Khemka - Head of Research, Wealth Management, Motilal Oswal Financial Services.
Khemka expects 100bp of cumulative rate hikes over this tightening cycle. He stated that inflation, crude prices and the rupee will remain key monitorables, with the possibility of further rate hikes depending on the trajectory of core inflation and broader price pressures.
As the central bank raised the repo rate by 25bp to 5.5% from 5.25%, its first hike since February 2023, on Wednesday, the benchmarks fell sharply and the rupee weakened 0.4% to Rs 96.7/$, close to a record low. The Nifty 50 declined 0.76% to close at 22,603, while the Sensex fell 0.59% to close at 72,638. The broader market remained mixed, with the Nifty Midcap 100 declining 0.63%, while the Nifty Smallcap 100 gained 0.30%.
The decline in benchmarks on Wednesday comes after the benchmark indices – BSE Sensex and NSE Nifty – coupled a small recovery on Monday and Tuesday after weeks of relentless selling. However, with Brent crude prices surpassing the $100 per barrel mark again on Wednesday and the RBI’s MPC outcome signalling more rate hikes in future, sentiments turned sour.
Sumit Singhania, Head of Research- Bajaj Broking said that the RBI's 25 bps hike to 5.50% is defensible, and the shift to "calibrated tightening" matters more than the rate itself because it rules out near-term cuts. He added that the US Fed hiked in September, and markets still price a further hike by December, with the October 28 FOMC a live risk. That keeps pressure on the rupee and limits the RBI's room to stay accommodative.
While the market slipped, bond yields advanced on the news of a repo rate hike. The hawkish policy stance is likely to keep bond yields elevated, with the 10-year G-sec yield currently around 7.27% and expected to move towards 7.5% over the next six months, said Khemka.
The fresh jolt for equity investors comes as India has emerged as one of the worst-performing major equity markets globally in 2026 amid concerns ranging from AI disruption, persistent FII outflows and the latest US-Iran crisis. The index has declined about 14% year-to-date in 2026.
Much of this pressure comes from rising crude prices. For an oil-importing economy like India, elevated crude prices increase inflationary pressures, widen the import bill, put pressure on the rupee and squeeze corporate margins.
The US 10-year Treasury yield also broke past its 2007 peak to 5.3%, the highest since April 2002, with the 30-year at 5.6%. Higher US bond yields trigger FII selling in India by making risk-free dollar assets more attractive, which drains liquidity from emerging markets.