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Below the Perspective on RBI MPC by Mr. Sanjit Singh Paul, smallcase manager, Managing Partner Modular Capital

A rate hike was expected by December, according to market polls. While the primary objective of the RBI is to contain inflation, higher interest rates should also provide some support to the rupee by improving the relative rate of return on rupee assets. This could ease some of the pressure on the RBI's forex management and, through a firmer rupee, partially contain the imported inflation arising from higher crude-oil prices.

As a direct outcome of this move, lending rates will increase. This means high financing costs for housing, vehicles, and even corporate borrowing as banks transmit the hike to consumers. Sectors like real estate, autos, NBFCs and banks should face pressure. While a 25 bps hike is not a risk in itself to these sectors, a trend of subsequent hikes is. The secondary effect is a higher discount rate for computing valuation multiples. Consumer durables, infrastructure & capital goods, and new economy valuation-based enterprises should face the brunt. High-valuation SMIDs should also see some bit of revaluation (though they will technically bank on support from large caps).

RBI does see stronger economic growth, with the GDP forecasts being revised upwards. This means higher discounting will push the market lower, yet stronger economic growth will support it. The actual outcome remains to be seen.

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