India Inflation, RBI Rate Cuts and the Hike: What It Means for Stocks
· Members
A year ago, India's annual consumer price inflation fell to just 0.25%, the lowest reading since the official series began. Vegetable prices were down 27.6% and pulses (lentils, chickpeas and the like) were down 16.2%. Rural India measured outright deflation, at −0.25%. Twelve months on, inflation is 4.82% and climbing, and the Reserve Bank of India (RBI) has just raised its policy rate for the first time in more than three and a half years.
Watch it play outPrices almost stopped rising, then came roaring back
A year ago, Indian consumer prices were rising just 0.25% a year, the lowest since the official series began.
Food dragged it down: vegetables fell 27.6%, pulses 16.2%, and rural India measured outright deflation.
Twelve months on, inflation is 4.82% and climbing. The faint disc is where it was.
So the RBI has raised its policy rate for the first time in more than three and a half years.
Source: MOSPI; SBI Research; RBI
This piece covers both halves of that swing: why prices fell, how hard the RBI cut, why the record low was worse for corporate earnings than it looked, and which stocks gained and lost. Our view: low inflation did Indian equities less good than the headlines suggested, and the oil-driven inflation arriving now is the bad kind.
A few definitions first. The repo rate is the rate at which the RBI lends overnight to banks. It is India's version of the Fed funds rate. One crore is 10 million and one lakh crore is 1 trillion. We convert at ₹96.8 per US dollar, the rate on the day of the hike.
Watch it play outThe cushion between rates and inflation has almost gone
The repo rate, what the RBI charges banks overnight, stood at 5.50% when inflation hit its low.
Inflation was 0.25%, so borrowers were paying a real interest rate of more than 5 points.
Now inflation is 4.82% and the RBI has hiked back to 5.50%. The real rate is a sliver.
Source: MOSPI; SBI Research; RBI
How low did India's inflation go?
India measures inflation with the consumer price index (CPI), which the Ministry of Statistics (MOSPI) publishes every month. Under the old basket, food and drinks carried 45.86% of the weight. When food prices move, the headline moves with them.
Watch it play outAlmost half of India's inflation basket is food
Every month MOSPI prices a basket of what Indian households buy: the consumer price index.
Split the basket by weight.
Under the old basket, food and drinks carried 45.86% of the weight.
So when food prices move, the headline moves with them.
Source: MOSPI
Food prices moved a long way. Two years ago, vegetable prices were up 42.2% year on year. Twelve months later, better harvests had reversed that, and vegetables were down 27.6%. By then the food index had been falling for five straight months. Part of this was a base effect, since prices were falling from an unusually high peak. But the shelves really were cheaper: SBI Research counted 12 of 22 large states with negative inflation that month.
Inflation fell six points in a year, then climbed back
Months counted back from now. The last six readings are on MOSPI's new CPI series; earlier ones are on the old series.Source: MOSPI; Canara Bank Economic Research; Trading Economics
Gold pulled the other way. Gold jewellery sits in the CPI basket, and gold prices were up 57.8% year on year, which kept core inflation (everything except food and fuel) at 4.33%. Strip gold out, and SBI Research put that month's headline at −0.57% and core at 2.6%.
Vegetables did the damage; gold propped up the core
Vegetables−27.6%
Pulses−16.2%
Food and beverages−3.7%
Headline CPI+0.3%
Core CPI+4.3%
Personal care (incl. gold)+23.9%
Year-on-year inflation in the record-low month, on the old CPI series.
Source: MOSPI via SBI Research Ecowrap
Did the GST cut lower prices too?
Yes, and by more than expected. A few weeks before inflation bottomed, India overhauled its goods and services tax (GST), the national sales tax. Most goods now fall into two slabs, 5% and 18%; the 12% and 28% slabs are gone. Pan masala, aerated drinks and high-end cars moved to a new 40% rate. Small cars, two-wheelers up to 350cc, TVs, air conditioners and cement dropped from 28% to 18%. Soap, shampoo, toothpaste and packaged snacks fell to 5%. Packaged paneer, UHT milk and Indian breads became tax-free.
Make a guess
Spot on.Close, a little low.Close, a little high.Way off, too low.Way off, too high. It was 85 bp.
About 85 basis points, more than SBI's own forecast.
Estimated CPI reduction from GST85 bp
Pre-cut estimate, midpoint70 bp
Source: SBI Research Ecowrap
The effect was still visible nine months on: in MOSPI's item-level data, car prices were 6.9% lower than a year earlier. Motorcycles and scooters were 3.5% lower, and the whole "purchase of vehicles" group was down 4.6%. Cars and motorcycles were among the five items with the lowest inflation in the entire basket.
Find the tax cut
Tap the line you think is the tell.
Spotted it.Not that line. Cars are the clean GST fingerprint. Motorcycles (−3.49%) show the same effect on a smaller scale.
Source: MOSPI CPI press release
What is India's new CPI series and does it change the picture?
Starting with this year's data, MOSPI switched to a new CPI series with a more recent base year. The weights now come from the latest national household spending survey. Food and beverages drop to 36.75% of the basket from 45.86%. Almost 6 points of that drop reflects households genuinely spending a smaller share on food; the rest comes from a new international classification system. The basket grows to 358 items in 12 categories, adds rural rents, streaming services and online prices, and drops VCRs and cassette tapes.
For investors, the key change is that Indian inflation will now react less to vegetable and pulse prices. That works in both directions. A bumper harvest won't drag the headline down as far as it did last year, and a bad monsoon won't push it up as far. Housing, transport and services carry more weight.
Check the claimThree claims about India's low inflation
How far did the RBI cut rates, and what did the CRR cut do?
India's monetary policy is set by a six-member Monetary Policy Committee (MPC) with a target of 4% CPI inflation, plus or minus 2 points. As inflation fell, it moved quickly. It opened the cycle with a 25 basis point cut and followed with another at the next meeting. At the meeting after that, it surprised markets with a 50-point cut to 5.50%. After two pauses, it cut once more to 5.25%. In total, rates fell 125 basis points in ten months.
It also eased through liquidity. Indian banks must park a slice of their deposits with the RBI as the cash reserve ratio (CRR), and those balances earn nothing. Alongside the 50-point cut, the RBI announced a CRR cut from 4% to 3%, phased in over four steps a few months later. That released about ₹2.5 lakh crore ($26 billion) for lending. With the final rate cut it added ₹1 lakh crore of government bond purchases and a $5 billion dollar-rupee swap.
125 bp of cuts in ten months, then a reversal
20 mo agoCut to 6.25%First cut of the cycle
18 mo agoCut to 6.00%Stance moved to accommodative
16 mo ago50 bp cut to 5.50%CRR cut 4% to 3%; stance back to neutral
10 mo agoCut to 5.25%₹1 lakh crore bond buying, $5B swap
2–8 mo agoFour holds at 5.25%
LatestHike to 5.50%Stance: calibrated tightening
Source: RBI; HSBC Mutual Fund; NSE Economic Policy & Research
The cuts reached the economy fast. By the time of the final cut, the overnight interbank rate had fallen 110 basis points. Over the first ten months of last year, rates on new fixed deposits fell 105 basis points and rates on new loans fell 69, according to NSE's review of RBI data.
Why was low inflation bad news for corporate earnings?
Companies sell in nominal terms: volume times price. GDP headlines report real growth, which strips inflation out, so a strong real economy can still produce weak revenue.
India's real GDPgrew 7.7% in the last fiscal year. But nominal GDP grew only 8.9%, so the GDP deflator, the economy-wide price index, rose about 1.1%. In the quarter that contained the GST cut, the deflator rose just 0.5%, which ICRA called a 24-quarter low. Nifty 50 earnings per share grew about 6% over the fiscal year, according to HDFC Mutual Fund. That is less than the economy's real growth rate.
Real growth was strong; nominal growth, which pays the bills, wasn't
Nominal GDP growthReal GDP growth
24681012%0
8.1%6.9%
Qtr, yr agoNominal GDP growth8.1%Real GDP growth6.9%
8.9%7.7%
Last FYNominal GDP growth8.9%Real GDP growth7.7%
10.3%7.8%
Latest qtrNominal GDP growth10.3%Real GDP growth7.8%
Qtr, yr agoLast FYLatest qtr
New GDP series. The gap between the bars is the GDP deflator: about 1.1% for the last fiscal year and 2.3% in the latest quarter.Source: MOSPI GDP press notes
Here is a worked example. Suppose a consumer company sells 7% more units. If prices rise 1%, revenue grows about 8%. If prices rise 4%, revenue grows about 11%. Wages, rent and interest don't fall just because inflation does, so those extra three points of price growth flow largely to profit.
Make a guess
Spot on.Close, a little low.Close, a little high.Way off, too low.Way off, too high. It was about 6%.
About 6%. Profits tracked weak nominal growth, and rate cuts squeezed bank margins.
Nifty 50 EPS growth, last fiscal yearabout 6%
Real GDP growth8%
Nominal GDP growth9%
Source: HDFC Mutual Fund; MOSPI
How did RBI rate cuts hit bank margins?
Banks are among the largest companies in the Nifty 50, and rate cuts hurt them in the short run. Most floating-rate retail and small-business loans are tied to the repo rate and reset on a short schedule. Term deposits only reprice when they mature. So when the RBI cuts, loan yields fall almost immediately while funding costs lag, squeezing the net interest margin (NIM): the spread between what a bank earns on loans and pays on deposits.
HDFC Bank, India's largest private lender, shows the pattern. Its net interest income growth slowed from 10% in the quarter the cuts began to 3% a year later, then recovered to 7% in the latest quarter as deposit costs caught up. Across all commercial banks, the RBI puts the average margin at 3.22% at the end of that quarter, only slightly below 3.26% a year earlier, because the CRR release and falling deposit rates cushioned the blow.
HDFC Bank's interest income growth bottomed at 3%
5 qtrs ago10%
4 qtrs ago5%
3 qtrs ago5%
2 qtrs ago6%
1 qtr ago3%
Latest qtr7%
Standalone net interest income, year-on-year growth, counted back from the latest reported quarter.
Source: HDFC Bank investor presentation
How much a cut hurts depends on two things: how much of the loan book resets right away, and how quickly deposits roll over. The model below is a simplified bank, not any real lender.
A 125 bp cut hurts most when loans reset fast and deposits don't
−5.4%+3.7%+12.6%−12.6%−3.4%+5.4%−19.7%−10.6%−1.7%below Margin before the cutabove Margin before the cutabove Margin before the cutbelow Margin before the cutbelow Margin before the cutabove Margin before the cutbelow Margin before the cutbelow Margin before the cutbelow Margin before the cut
Margin before the cut3.50%
2.81%3.94%
Hypothetical bank with loans equal to deposits and a 3.5% starting margin. Repo-linked loans and repriced deposits both move the full 125 bp; everything else is unchanged in year one.
The same mechanics now run in reverse: repo-linked loans reprice upward while deposits lag, which supports margins at first. It has already started. In the two most recent months of data, rates on new loans rose 8 basis points while rates on new deposits fell 28, as a surge of foreign-currency deposits from Indians abroad flooded banks with funding. Bank credit grew 18.1% over the latest twelve months, against 10.4% the year before, and the gross bad-loan ratio fell to 1.67% from 2.22%.
Why did NBFCs do better than banks?
Non-bank financial companies (NBFCs) are lenders without banking licences, such as Bajaj Finance, Muthoot Finance and Shriram Finance. They have the opposite balance sheet. They borrow through bonds, commercial paper and bank loans, which reprice quickly. Many of their loans, including vehicle, gold and personal loans, carry fixed rates. When rates fall, their funding cost drops faster than their loan yields.
The RBI's data shows this. NBFC margins rose to 5.39% from 4.99% a year earlier, and return on assets rose to 3.37% from 3.01%.
Falling rates widened NBFC margins while banks' slipped
A year earlierLatest
123456%0
3.26%3.22%
BanksA year earlier3.26%Latest3.22%
4.99%5.39%
NBFCsA year earlier4.99%Latest5.39%
BanksNBFCs
System-level net interest margin for scheduled commercial banks and for NBFCs.Source: RBI Governor's Statement
A hiking cycle reverses this. Muthoot Finance's executive vice chairman said the hike means "less about a slowdown in credit and more about becoming sharper on funding, liquidity." NBFC margins have probably peaked.
Who won from cheap money and GST cuts: autos, consumer or property?
Autos won. The rate cuts and the GST cut together gave India's car and motorcycle makers their first industry-wide sales record in seven years. Last fiscal year, passenger vehicle sales rose 8% to 4.64 million and two-wheeler sales rose 10.7% to 21.71 million, according to SIAM, the manufacturers' association. Demand is still running hot: two-wheeler retail sales grew 26.9% in the quarter just ended, and the RBI's data shows durable consumer goods output up 11.5% over the latest two months.
Everyday staples did not share in the boom. Over the same two months, output of consumer non-durables, the soaps, foods and toiletries that FMCG (fast-moving consumer goods) companies sell, grew just 0.6%. Low inflation helped their margins, because raw materials were cheap, but did little for revenue: with prices barely rising, sales could grow only as fast as volumes. Now input costs are climbing. Sugar rose about 34% in under two months over the summer, and onion prices rose about 85% in roughly three months.
Real estate got two boosts: cement fell from 28% GST to 18%, and repo-linked home loans repriced lower with every cut. The hike reverses the second. Autos and property are cyclical stocks, and their rate tailwind is now a headwind.
Why did the RBI start raising rates again?
The MPC's own words: inflation and its outlook "are not benign as they were last year." Three shocks arrived together:
Oil. After renewed fighting in West Asia last month, the price of India's crude import basket jumped to $116.1 a barrel, from $82.0 just two months earlier.
The monsoon. Rainfall ended the season 13% below its long-run average, and a strong El Niño threatens the winter crop.
Broadening. Core inflation rose to 4.2% in the latest print after three months at 3.9%. Items with inflation above 4% now make up about 37% of the CPI basket.
The RBI expects inflation to average almost 5.8% over the next three quarters and to peak at 6.0% in the current quarter. That is the top of its tolerance band.
The RBI expects inflation to hit 6% this quarter
2 qtrs ago, actual3.9%
Last qtr4.9%
This qtr6.0%
Next qtr5.7%
Qtr after5.6%
CPI inflation by quarter. The first bar averages MOSPI's monthly prints (3.48%, 3.93%, 4.38%); the rest, including the quarter just ended, are RBI projections.
Source: RBI MPC resolution; MOSPI
The rupee traded near ₹96.84 per dollar on decision day, close to the record low of ₹96.96 it hit five months ago. A weaker rupee makes imported oil dearer, and the Fed's 25-point hike last month narrowed India's rate advantage. But the RBI did not present the hike as a currency defence: Governor Sanjay Malhotra said the rupee "may be undervalued." The hike vote was unanimous, though two members opposed the new "calibrated tightening" stance, which means the next move is a hike or a pause. More on the currency in the rupee and US tariffs.
The clearest way to see how far policy has moved is the real policy rate: the repo rate minus inflation.
Real rates went from punishing to negative
A year ago: 5.50% repo vs 0.25% CPI+5.25 pts
Now: 5.50% repo vs 4.82% CPI+0.68 pts
5.50% repo vs 5.8% expected CPI−0.30 pts
Repo rate minus year-on-year CPI inflation. The last bar uses the RBI's average forecast for the next three quarters.
Source: RBI; MOSPI; Yield Theory calculations
At the inflation low, with prices up 0.25% and the repo rate at 5.50%, borrowers in India were paying a real interest rate of more than 5 points. That is why the RBI cut once more two months later. If inflation averages 5.8% and the repo rate stays at 5.50%, the real rate turns negative. That gap is why HSBC expects another 25-point hike at the RBI's next meeting.
Is low inflation good or bad for Indian stocks?
It depends which kind of inflation
Healthy inflation (3–5%)
Demand-led; firms can raise prices
Nominal GDP of 10%+ on 7% real growth
Revenue and tax growth keep up
Banks earn a normal spread
Too-low inflation (last year)
Food glut and tax cuts
Nominal GDP 8.9% despite 7.7% real
Nifty EPS up about 6%
Bank margins squeezed by cuts
Supply-shock inflation (now)
Oil at $116 and a weak monsoon
Input costs rise faster than prices
Rates rise; rupee weak
Rural spending at risk
Low inflation lets the RBI cut rates, which makes future profits worth more today. It also shrinks nominal revenue, which reduces those profits. Over the last fiscal year in India, the second effect won. The Nifty 50 set a record close of 26,328.55 in the first days of this year. On the day of the hike it ended near 22,600, about 14% lower. The slump has other causes too, covered in why the Indian stock market is falling, but falling rates never delivered the earnings growth that higher prices needed.
The return of inflation also has an upside. Nominal GDP growth rebounded to 10.3% in the latest quarter, up from 8.1% a year earlier, and revenue growth usually follows. The problem is where this inflation is coming from. Oil and weather shocks raise companies' costs before they can raise prices, hurt the rural households that buy staples and two-wheelers, and force the RBI to tighten anyway.
What could prove this view wrong?
Oil is the swing factor. If the West Asia conflict ends and crude falls back toward the $82 it fetched three months ago, the RBI's 6% peak won't arrive and another hike won't be needed. The new CPI's lower food weight also means a bad harvest moves the headline less than it once would have. On banks, the risk is funding: the foreign-currency deposit surge holding costs down won't last forever, and if the RBI drains liquidity, deposit rates could rise faster than loan rates.
Our read
India's record-low inflation was a mixed blessing. It gave the RBI room to cut by 125 basis points, but it also starved companies of pricing power, held nominal GDP to 8.9% and kept Nifty earnings growth near 6%. Cheap money alone couldn't deliver an earnings recovery.
That cycle is over. The latest hike and the RBI's statement that cuts are "off the table" end the easing story. Stocks held as rate-cut plays have lost their reason to be held.
Banks are best placed: loans reprice upward before deposits, deposits from Indians abroad are holding down funding costs, credit is growing 18% and bad loans are at 1.67%. NBFCs, the biggest winners from falling rates, now see funding costs rise first. Autos had their tax-cut boost last fiscal year and now face rising EMIs (monthly loan payments); FMCG companies are paying more for sugar, onion and fuel while a weak monsoon threatens rural spending.
For Indian stocks, the source of inflation matters more than its level. Demand-led inflation of 4–5% would lift nominal growth and earnings; what India is getting comes from oil and weather. Watch the next few CPI prints and the Indian crude basket more closely than the RBI's next meeting.
Go deeper
Pricing power and inflation: learn how to tell which consumer companies can pass on higher sugar, fuel and packaging costs and which will absorb them.
Risk and scenarios: build oil-price and monsoon cases the way the RBI does, then see what each one does to a bank's margin or an automaker's volumes.
Cyclical companies: banks, NBFCs, automakers and property developers all move with the rate cycle. This chapter shows how to value them at a turn instead of extrapolating the last year.
Members get our full stock-level research. Join to read it.
A year ago India's inflation hit a record-low 0.25% and the RBI went on to cut rates by 125 basis points. Now inflation is 4.82% and the RBI has just raised rates. Here's what both swings meant for bank, NBFC, consumer and auto stocks.
A US investor in the Nifty 50 is down about 20% in dollars this year, and almost a third of that loss is the rupee. Here is how the rupee reached 96.96, what happened to the 50% US tariff, and which Indian stocks win and lose.
The thesis, the numbers behind it, and what would break it. Full access is $39 a month.
consumer price index (CPI), which the Ministry of Statistics (MOSPI) publishes every month. Under the old basket, food and drinks carried 45.86% of the weight. When food prices move, the headline moves with them.