I closed my last post promising to come back with what the “higher for longer” regime means for portfolios (see here). Before I get there, it is worth pausing on where the RBI itself stands in this story, because India’s hand is not quite the same as the one the Fed, the BoJ or the ECB are holding.
The repo rate has sat at 5.25% through four straight policy reviews. Going into the October 5-7 meeting, the conversation among economists has shifted from “will the RBI hold” to “how much will it raise.” A hawkish pause is no longer the base case doing the rounds; a 25-50bps move in October, with more to follow in December, is. By the time this cycle is done, my own sense is the repo rate ends up a good 50-75bps above where it sits today.
Curiously, short-term money market rates are still trading below that 5.25% mark, not above it. That is the FCNR(B) window talking – the RBI’s special swap facility pulled in close to $133bn of NRI deposits by the time it shut at the end of August, and together with external commercial borrowings and overseas foreign currency borrowings, total inflows under the facility had crossed $143bn by mid-September. That is a lot of rupee liquidity sloshing around the banking system, and the RBI has been mopping it up through fairly aggressive open market bond sales rather than touching the policy rate itself. Even so, the benchmark 10-year G-sec yield has stayed above 7% for weeks now, and the curve remains steep at the long end – the market’s way of saying it does not fully believe the short-end calm will last.
On the inflation side, August CPI came in at 4.82%, up from 4.45% in July, and food prices are doing most of the damage. The southwest monsoon is closing out with a deficit of around 15%, and forecasters now see the El Nino in the Pacific strengthening further as we head into winter, which puts a question mark over the rabi season and, by extension, over food inflation through the next two quarters. A rupee that keeps flirting with the 96-to-the-dollar mark is not helping either – whatever pass-through shows up in energy and other imported inputs adds to that same pressure. Food and energy together, then, not a demand story, look set to be the swing factor for inflation over the next six months.
Growth, meanwhile, refuses to cooperate with the doom-mongers. The RBI’s own FY27 estimate has been revised up twice this year to 6.7%, and a clutch of private forecasters now sit closer to 7%. With growth this resilient, there is little reason for the MPC to look past the inflation print in its trade-off, and every reason to expect it will keep leaning towards price stability rather than growth support.
So, what should the investment strategy stance be under these circumstances? In my view, investors should –
• Not build a base case around imminent rate cuts, in India or anywhere else; price discovery for equities and bonds should assume the current cost of capital persists into 2027.
• Treat AI-linked disinflation as a slow-moving, narrow effect, not a macro offset to energy-driven inflation.
• Watch the RBI’s non-rate toolkit as closely as the repo rate itself; between the $143bn of FCNR(B)/ECB/OFCB inflows, OMO sales and swap operations, it is currently doing more of the work than the headline number suggests.
• Size allocations to alternatives such as gold and crypto around the structural, diversification-driven demand from central banks, rather than around the cyclical, rate-driven leg, which has already started to fade.
• Favor balance sheets and business models that can absorb a higher cost of capital for longer, rather than ones underwritten on the assumption that cheap money and a fresh round of quantitative easing would be back before too long.
The broader lesson is one the Gita states more elegantly than any market commentary can – yogasthah kuru karmani, act with steadiness, without being swayed by outcomes that keep shifting day by day. The rate cycle will turn again eventually. Portfolios built on patience will be in better shape to meet that turn than those built on guessing when it arrives.
Thought for the day
“Bigamy is having one wife too many. Monogamy is the same.”
—Oscar Wilde (Irish Poet, 1854-1900)
Word for the day
Enormity (n)
Outrageous or heinous character; atrociousness