RBI Hikes Repo Rate 25 bps to 5.5%; Jefferies Flags Shift to Bonds

• RBI raised repo rate 25 bps to 5.5%, signaling possible further hikes
• Jefferies India recommends rotating from equities to government bonds
• Stance shift to calibrated tightening pressures equity valuations

The Reserve Bank of India raised its benchmark repo rate by 25 basis points to 5.5 percent, a move that Jefferies India described as in line with expectations. More significantly, the central bank shifted its policy stance to calibrated tightening from withdrawal of accommodation, signaling that the rate-hike cycle may not yet be over. Jefferies analysts expect at least one more hike before the RBI pauses, citing persistent inflation pressures from elevated commodity prices and a resilient domestic demand environment.

For equity investors, the recalibrated stance carries clear implications. Rising interest rates compress the valuation multiples assigned to growth stocks, as higher discount rates reduce the present value of future earnings. Jefferies India's sector analysis suggests trimming exposure to rate-sensitive names such as real estate developers and highly leveraged NBFCs, while building positions in public sector banks that can reprice their loan books upward and benefit from higher net interest margins as the rate cycle progresses.

Government bonds now offer a compelling risk-return tradeoff for institutional and retail investors who previously favored equities. With the 10-year government security yield rising in tandem with repo rate expectations, fixed income instruments provide a relatively safe haven during equity market volatility. A disciplined rotation into sovereign bonds and top-rated corporate debt could help investors preserve capital while positioning for reinvestment opportunities once the RBI signals a definitive pause in the hiking cycle.

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