The Reserve Bank of India’s policy decision is expected on Friday and economists are divided over whether the central bank will hike rates or keep them unchanged. If rates stay unchanged, the Indian rupee may weaken and come under pressure in the short term, as per the Reuters report. However, in such scenarios the central bank may step in to control sharp currency moves, so the fall may not be too big.
(REUTERS/Francis Mascarenhas/File Photo/File Photo) (REUTERS)
If rates remain unchanged, short-term bonds may rise slightly, but long-term bonds could stay under pressure because inflation fears may remain, says ANZ FX and rates strategist Dhiraj Nim.
Traders expect only a small move of around 5 basis points in this situation.Indian stock markets may not react much to unchanged rates, as per AlphaGrep Mutual Fund CEO Bhautik Ambani, Reuters. He adds, but if inflation forecasts are increased, markets may start expecting future rate hikes in FY2026–27.
Here’s what to expect in each scenario
25 basis point rate hike, no change in stance
A 25 bps rate hike could support the rupee because it shows RBI is actively defending the currency. Even if the repo rate rises by 25 bps, the 10-year government bond yield may stay below 7.15%. Equity markets may fall because higher rates make borrowing more expensive. Rate-sensitive sectors like real estate, banks, and consumer spending companies may face pressure in valuations, says Bhautik Ambani, in the Reuters report.
25 basis point hike plus change in stance
A rate hike plus a more aggressive stance could give a stronger boost to the rupee as it signals more tightening ahead. The rupee may initially react sharply and could face resistance near 94.80 per US dollar. If RBI also adds extra measures to support the rupee, it may strengthen further. The 10-year bond yield may rise and trade in the 7.15% to 7.20% range in the short term, as noted by Reuters.
50 basis point rate hike
A 50 bps rate hike would surprise markets and likely give the strongest support to the rupee among all options. The rupee could strengthen to around 94 per US dollar after such a move. Bond markets would react strongly, especially short-term yields, which may rise faster than long-term yields.
The 10-year government bond yield could rise to at least 7.25%. This would create a “bear flattening” of the yield curve, meaning short-term rates rise faster than long-term rates, notes Standard Chartered Bank strategist Nagaraj Kulkarni, Reuters. Such a big hike would also likely cause heavy selling in stock markets, he added. Equity investors would reassess risk and expect higher safe returns, which hurts stock valuations, Kulkarni concluded.
(With inputs from Reuters)
