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The global economy is entering a period of higher interest rates and more expensive capital, as major central banks have started moving away from the low-interest-rate environment of the past few years, according to a recent analysis by Motilal Oswal Financial Services (MOFSL).

The report notes that the US Federal Reserve, European Central Bank and Bank of Japan have raised interest rates in September, while the Bank of England has kept its rate unchanged but maintained a cautious stance. China remains an exception and continues to follow a supportive monetary policy. According to MOFSL, the global shift is leading to tighter financial conditions, with higher interest rates and bond yields making borrowing more expensive.

For India, higher global bond yields and crude oil prices are emerging as key concerns. The 10-year Indian government bond yield has moved to around 7%, while higher US bond yields, elevated crude prices and RBI liquidity measures could limit any significant fall in Indian bond yields. MOFSL expects the 10-year government bond yield to remain in the 7.0–7.2% range for the rest of FY27.

The report also points to rising inflation risks in India. While the August inflation reading remains manageable, food inflation is close to 6% and higher oil prices could increase transportation and other input costs. MOFSL expects these pressures to push retail inflation above 6% in the third quarter of FY27 and retains its FY27 inflation forecast at 5.1%, slightly above the RBI’s 5% projection.

Against this backdrop, MOFSL believes the RBI could consider raising interest rates if crude oil prices remain high and inflation expectations increase. Under a sustained oil shock, the report sees the possibility of 75–100 basis points of cumulative rate hikes in the current cycle. It also notes that financial conditions in India are already becoming tighter through higher bond yields, liquidity absorption and higher global borrowing costs, even before a formal repo-rate hiking cycle begins.

The impact of higher interest rates is likely to be different across sectors. Banks could be relatively better placed as their floating-rate loans can be repriced, while stronger deposit franchises could provide some support against higher funding costs. NBFCs could face greater pressure because of their higher dependence on wholesale funding and refinancing. Real estate, automobiles, consumer durables and highly leveraged businesses could also be more sensitive to higher borrowing costs.

At the same time, export-oriented sectors such as IT and pharmaceuticals could get some support from a weaker rupee. However, IT companies could continue to face pressure if global technology spending slows. The report expects the broader market to increasingly differentiate between companies based on their balance sheets, borrowing needs, pricing power and dependence on consumer demand.

MOFSL's broader view is that the global economy is moving away from the period of abundant and inexpensive money seen over the past decade. High government debt, elevated inflation, large money supply and higher financing costs are making a return to the earlier low-cost funding environment increasingly difficult. The report expects the period ahead to be one of tighter financial conditions and higher cost of capital, with the impact varying across countries, sectors and companies.

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