A change in the Reserve Bank of India (RBI) policy stance and rate hikes would impact companies with highly leveraged balance sheets or those overly dependent on short-term working capital. However, the leverage of Indian corporates, on average, is at decadal lows; hence, an all-round adverse impact on interest costs is unlikely, according to Harsha Upadhyaya, chief investment officer at Kotak Mahindra AMC. Upadhyaya also said that while short-term investors using the Systematic Investment Plan (SIP) route were facing a reality check, long-term investors were exceptionally resilient.
The Reserve Bank of India's shift from a ‘neutral’ stance to ‘calibrated tightening’ serves as explicit forward guidance that near-term rate cuts are completely off the table. By signalling that future policy moves will strictly be either another rate hike or a data-dependent pause, RBI has reshaped expectations for the corporate sector and the markets.
The transition to a tightening cycle primarily alters borrowing costs and valuation frameworks for Indian corporates. However, the macro picture remains balanced by resilient domestic demand, as evidenced by RBI's upgrade of its FY27 GDP growth forecast to 7.1%. Elevated repo rates (now at 5.50%) will gradually translate into higher borrowing costs. Highly leveraged corporations and companies reliant on short-term working capital will face increased interest expense, directly weighing on net profit margins. However, the leverage of Indian corporates is, on average, at decadal lows; hence, an all-round adverse impact on interest costs is unlikely.
The mid- and small-cap baskets outperformed the large-cap basket over the past year, mainly due to superior relative earnings growth. While we may have entered a rate-hike cycle, the extent of further rate hikes is expected to be quite moderate (possibly 1 or 2 more hikes in this cycle, as per current expectations), and, as mentioned earlier, average leverage levels are also quite low. Therefore, any meaningful impact on interest costs is likely to be limited to only highly leveraged companies in the Indian corporate sector.
We have not made any significant changes to our earnings expectations following the repo rate increase. However, I must mention that the global macro situation is quite volatile, and hence earnings estimates may need to be monitored as we go along. Currently, we expect about 14-15% earnings growth for the Nifty basket in FY2026-27. The first-quarter earnings, despite the war in West Asia and the energy shock it triggered, were above expectations and showed positive 17% year-on-year growth.