Written by Dr. Amit Goenka, CMD at Nisus Finance
India : When the Monetary Policy Committee announces its decision on 7 October, markets expect a 25 bps hike to 5.50%, the first increase since February 2023. This follows four holds at 5.25% after 125 bps of cuts in 2025. The case for tightening is clear. CPI inflation rose to 4.82% in August and WPI to 9.92%, with Brent averaging above $100. The rupee is down about 6.5% this year, and forex reserves fell a record $18.3 billion in a single week.
Banking: relief first, strain later
Most bank loans are now linked to external benchmarks, so they reprice faster than deposits. Net interest margins, squeezed during the 2025 easing, should get short-term relief. The offsets are treasury losses as bond yields rise and, with a lag, stress among leveraged borrowers, especially MSMEs and unsecured retail. The real test is whether deposit growth keeps up with credit demand, because a liquidity squeeze would bite harder than the repo rate itself.
Real estate: a modest move, a larger signal
A 25 bps hike on a 20-year loan raises the EMI by roughly 2%, which is manageable. Two hikes, which would take the repo rate to 5.75% by December, combined with home loan rates of 8.4% to 9.35%, would begin to hurt affordability in the mid-income segment. Premium housing is less rate-sensitive. Developers face higher construction finance costs and may defer launches, which tightens supply and can support prices even as volumes soften.
REITs: the yield spread matters most
REITs are priced against the risk-free rate. When government bond yields rise, unit prices adjust until the yield spread is restored. The cushions are contractual rent escalations and high occupancy in Grade A offices, where leasing depends more on corporate demand than on rates. Highly leveraged platforms that must refinance in a rising-rate environment are the most exposed. Fixed-rate or long-tenure debt will be a differentiator.
Does the RBI have other options?
A rate hike is a blunt response to an oil shock it cannot control. A broader toolkit exists:
• Currency management: Intervention and buy-sell swaps help, but falling reserves limit how long this can continue.
• Liquidity tools: CRR, open market operations and variable rate operations can tighten or ease conditions without moving the headline rate.
• External financing: Incentives for NRI deposits and swap windows, as in 2013, can attract dollar inflows.
• Fiscal coordination: Calibrated excise adjustments and continued diversification of crude sourcing would ease pressure on inflation and the rupee.
• Forward guidance: A shift in stance, rather than a series of hikes, can anchor expectations at a lower growth cost.
The most credible path is likely a measured hike with explicit data dependence, backed by fiscal and liquidity measures. Aggressive tightening into a supply shock risks choking a still-resilient economy, since the flash manufacturing PMI rose to 55.7 in September.
Is a global recession coming?
Synchronous tightening in response to energy-driven inflation raises the risk of stagflation more than of a classic recession. The 2022 precedent is instructive: sharp global hikes slowed growth considerably but did not produce a worldwide recession. This time the shock comes from supply, as the Strait of Hormuz disruptions earlier this year showed, which makes the trade-off harsher. Central banks cannot print oil. My base case is a global slowdown with pockets of recession in energy-importing, high-leverage economies. A synchronised downturn becomes likely only if Brent stays well above $110 for a prolonged period and credit conditions tighten sharply.
India enters this cycle with strong domestic demand and a relatively healthy banking system, but with external vulnerabilities that make oil and the rupee the key variables to watch.
The takeaway
The RBI’s task is to anchor inflation expectations without turning an imported price shock into a domestic growth shock. Investors in banks, real estate and REITs should focus less on the size of the first hike and more on the path of oil, the rupee and the central bank’s guidance.
This reflects information available ahead of the 7 October decision; the outcome may differ from expectations.
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