On October 7, 2026, the RBI MPC unanimously hiked the repo rate by 25 bps to 5.50%—the first increase since February 2023. Driven by rising inflation, oil prices, and rupee pressure, the stance shifted to hawkish “calibrated tightening,” taking near-term rate cuts off the table.
1. Inflation Trajectory & Estimates
Headline CPI inflation for FY27 was revised upward to 5.2% due to West Asia conflicts and weather-impacted crops, while core inflation is expected to remain contained at 4.4%.
Upward inflation is driven by El Niño crop risks, West Asia conflicts, Russia-Ukraine refinery disruptions, and high shipping costs adding $30 per barrel.
Quarterly Headline CPI Inflation Projections (FY27 – FY28)
| Headline Inflation | ||
| Quarter | August 26 MPC | October 26 MPC |
| FY27 – Q2E | 4.7% | 4.9% |
| FY27 – Q3E | 5.9% | 6% |
| FY27 – Q4E | 5.5% | 5.7% |
| FY27 | 5% | 5.2% |
| Q1FY28 | 5.3% | 5.6% |
2. Economic Growth Projections
Reflecting steady manufacturing, services, and demand, the MPC raised FY27 GDP growth to 7.1%, though weak non-durables, air traffic, and El Niño remain headwinds.
| Real GDP | ||
| Quarter | August 26 MPC | October 26 MPC |
| FY27 – Q2E | 6.4% | 7.2% |
| FY27 – Q3E | 6.5% | 6.9% |
| FY27 – Q4E | 6.8% | 6.8% |
| FY27 | 6.7% | 7.1% |
| Q1FY28 | 7.3% | 7.1% |
3. Liquidity & Global Capital Competition
Liquidity has increased substantially in the past few months due to recent measures to attract capital inflows. Short-term rates eased, but government bond yields rose from mid-August to September, driven by Middle East tensions, rising global yields, and higher crude oil prices.
4. External Sector & Foreign Capital Flows
Strong net FDI of $13.8 billion (Apr–Aug 2026) offset net FPI outflows of $10.3 billion, keeping India’s Q1 Current Account Deficit contained at 0.5% of GDP. Backed by foreign exchange reserves providing 11 months of import cover and 94.4% external debt cover, market estimates project a positive full-year Balance of Payments (BoP) surplus of 1.0% to 1.2% of GDP ($50 billion) for FY27.
5. Strategy Considerations
Debt Portfolio Strategy
To limit price volatility amid rising policy rates, focus allocations on short-to-medium duration instruments to maintain liquidity while securing higher short-term yields.
Equity Portfolio Strategy
Favor low-debt, large-cap stocks at a 4% historical premium (15.25% earnings growth by 2028) over mid and small-caps with a high premium of 55% and 68%.
We remain consistent with our equity and debt stance – large-cap with a 3- to 5-year investment horizon. Debt – Short-term with categories that provide better tax advantages.
· Nifty 50: Eased from 22,700 to 22,600, reflecting a mild adjustment to the rate hike.
· 10-Year Yield: Rose 4 bps to 7.24%, driven by tighter monetary conditions.
· Rupee: Depreciated from 96.40 to 97.03 due to global pressures and higher crude oil costs.
Conclusion:
While domestic economic growth remains firm, the RBI’s rate hike and hawkish shift reflect a clear priority to control inflation against persistent geopolitical risks, rising global real yields, and supply-side energy costs.