Nifty, Sensex pare losses; banks stage recovery as RBI turns hawkish

Benchmark indices trimmed most of their early losses on Wednesday as banking stocks recovered after the Reserve Bank of India raised the repo rate by 25 basis points to 5.5% and shifted its monetary policy stance to “calibrated tightening”.

The rate hike was largely expected by the market, but analysts said the change in stance was the more important takeaway, indicating that the central bank is becoming more focused on inflation risks even as domestic growth remains resilient.

The Sensex, which had fallen 547 points in early trade, was down around 154 points at 72,929.75 around 12:45 pm. The Nifty, after declining 197.85 points to 22,578.25, recovered to 22,687.35.

‘Calibrated tightening’ key signal

V K Vijayakumar, chief investment strategist at Geojit Investments, said the RBI had delivered a “timely, hawkish rate hike”, with the shift from a neutral stance to calibrated tightening being the highlight of the policy.

“This implies, perhaps two more rate hikes in this tightening cycle,” Vijayakumar said.

He also pointed to the RBI’s decision to raise its FY27 GDP growth forecast by 40 basis points to 7.1% from 6.7% earlier as a sign of confidence in the economy.

“This augurs well for the market. From the sectoral perspective, banking looks the clear winner. Rising floating rates are margin accretive for banks,” he said.

Ajit Mishra, SVP-Research at Religare Broking, said the change in stance was more important than the 25-bps hike itself.

“The change in stance is the more important takeaway, indicating that inflation risks are now taking greater precedence,” Mishra said.

He pointed to elevated crude prices, weather-related risks and August CPI inflation of 4.82%, while noting that Q1 FY27 GDP growth of 7.8% gives the economy room to absorb some tightening in financial conditions.

Analysts see more rate hikes

Siddharth Chaudhary, Head-Fixed Income at Bajaj Asset Management, said the RBI’s decision was in line with expectations and marked a shift in the policy backdrop.

“GDP growth has improved, credit growth remains strong, inflation is becoming increasingly broad-based rather than confined to a few volatile categories,” Chaudhary said.

He added that a stronger US dollar, higher global bond yields and restrictive monetary policies in several economies meant emerging markets needed a stronger real-rate cushion.

“We believe today's move marks the beginning of a calibrated normalization cycle rather than a one-off action,” he said, adding that cumulative tightening of 75-100 basis points remained a possibility depending on crude prices and global macro conditions.

Dnyanada Vaidya, Research Analyst-BFSI at Axis Direct, also expects another 25-bps hike at the next MPC meeting.

“The RBI’s decision to hike repo rates was largely anticipated,” Vaidya said, citing firm crude prices and persistent inflationary pressures.

Banks in focus ahead of earnings

Vaidya said the focus will now shift to Q2 earnings from banks, particularly net interest margins (NIMs), which remain a key pressure point even as credit growth and asset quality stay firm.

She said deposit growth, which had remained around 11-12% over the past few quarters, has picked up, helped by FCNR(B) inflows, while credit growth remains strong and broad-based.

“Near-term margins will continue to see pressure due to excess liquidity and lower-spread lending. Outlook for NIMs turns constructive for H2, with rate hikes reflecting in EBLR-linked portfolios of banks,” Vaidya said.

She expects larger private banks to be among the bigger beneficiaries, while asset quality remains resilient.

Meanwhile, Brent crude was trading around $101.5 a barrel, adding to concerns over imported inflation and the rupee. Foreign institutional investors sold equities worth ₹2,961.30 crore on Tuesday, according to exchange data.