Sensex, Nifty Rally a Second Day as Dalal Street Braces for RBI's First Rate Hike Since 2023

Indian equities did something slightly counterintuitive on Tuesday: they rallied on the eve of what is widely expected to be the Reserve Bank of India's first interest rate increase in more than three and a half years.

The Sensex closed 685.34 points, or 0.95%, higher at 73,067.81, while the Nifty 50 gained 220.35 points, or 0.98%, to finish at 22,776.10. It was the second straight session of gains for both benchmarks, which had only just broken a punishing run of weekly losses, the longest in about 25 years.

A hike that is already in the price

The RBI's Monetary Policy Committee will announce its decision at 10 am on Wednesday, October 7. Most economists expect a 25 basis point increase that would take the repo rate from 5.25% to 5.50%. In a Business Standard poll, eight of ten respondents forecast exactly that move. The repo rate has been held at 5.25% for four consecutive meetings, and the last time the central bank raised rates was in February 2023.

The case for tightening has been building for weeks. Retail inflation has climbed to 4.82% and is expected to peak during the festive quarter. Brent crude is hovering around the $100-a-barrel mark, the rupee has weakened past 96 to the dollar, and the US Federal Reserve's recent hike has narrowed the interest rate gap between India and the US, adding pressure on the currency.

That is precisely why Tuesday's rally makes sense to many traders. When a hike is this well telegraphed, the uncertainty that weighs on stocks is not the move itself but what the RBI says alongside it. Investors will be listening closely to Governor Sanjay Malhotra's commentary on inflation, oil, the rupee, and whether this is a one-off adjustment or the start of a tightening cycle.

Lenders lead, not lag

Banks would normally be expected to wobble ahead of a rate increase. Instead, private lenders were among the day's strongest performers, helped by healthy deposit and loan growth in their September-quarter business updates. Kotak Mahindra Bank rose about 3.8% and Axis Bank gained 2.1%. Reliance Industries added 2.7% as optimism around a Jio Platforms listing continued to build.

On BSE, the capital goods index was the standout sector, jumping 1,333 points to 75,749, while the Bankex ended 330 points higher at 62,118. Fourteen of the 16 major NSE sectoral indices finished in the green. The laggards were Nifty Realty, down 0.7%, Nifty IT, down 0.6%, and PSU Banks, down 0.3%. Real estate stocks are typically among the most sensitive to borrowing costs, so their weakness fits the rate-hike narrative.

Breadth was firmly positive, with 2,685 shares advancing against 1,495 declining. The Nifty Midcap index rose 1.08% and the Smallcap index added 1.5%, a sign that buying was not confined to the largest names.

Foreign selling has not stopped

The rebound is happening without foreign money. Foreign portfolio investors were net sellers for a seventh straight session on Monday, pulling out Rs 4,699 crore, according to provisional NSE data. Domestic institutions more than absorbed that, buying Rs 5,182 crore of equities. That tug of war between steady domestic inflows and persistent foreign outflows has defined much of this year's market, and a stronger repo rate could, in theory, help slow the rupee's slide and make Indian assets slightly more attractive to overseas investors.

Global cues also helped. Wall Street closed higher overnight, with the Nasdaq at a record, after softer-than-expected US jobs data cooled bets on another Fed hike this month.

What it means for borrowers

For households, the more immediate question is loan costs. A 25 basis point hike would gradually feed into floating-rate home and car loans linked to the repo rate. Borrowers wanting to gauge the effect on their monthly outgo can run the numbers on our EMI calculator.

Whether the two-day bounce turns into a durable recovery will depend on Wednesday's tone from the RBI and on the September-quarter earnings season, which begins with TCS on October 8.

This is an original summary based on public reporting. See our editorial policy for how we source, write, and correct our stories.