Impact of interest rate hikes on your equity investments

The RBI announced a hike in repo rate by 0.40% yesterday and the equity markets reacted sharply by shedding over 2 per cent. Though the inflection point in the interest rate cycle was widely anticipated, its sudden announcement caught the markets by surprise. So does this shift in the policy stance necessitate a big shift in your equity portfolio? We derive some cues from the past reversals in RBI's stance vis-à-vis interest rates. What has happened? On 4th May, the RBI Governor announced raising interest rates by 40 basis points, with immediate effect, citing unabated inflationary pressures as the main reason. Indeed, inflation has become a cause of concern as it has remained well above the upper end of the RBI's comfort zone of 2-6 per cent in the last few months. But what drove it to those levels in the first place? Well, the fundamentals of economics teach us that inflation occurs when too much money (which creates demand for things) is chasing too few things (supply of things). In the current context, both these variables have contributed to the spike in inflation. The central governments across the globe have reduced interest rates to unprecedented levels during the pandemic to indu