Global investment bank Jefferies has identified a strategic preference for large-cap stocks, including Reliance Industries Ltd (RIL), Bharti Airtel, leading banks, and power utilities, as the Reserve Bank of India (RBI) embarks on a new rate-hike cycle. This shift in investment strategy comes amidst a changing monetary policy landscape and a potential 'risk-off' environment.
RBI Initiates 'Calibrated Tightening'
The RBI recently increased its benchmark repo rate by 25 basis points to 5.50%, a move that was largely anticipated by markets. However, a significant development was the Monetary Policy Committee's unanimous decision to change its stance from 'neutral' to 'calibrated tightening' through a 4-2 vote. Jefferies interprets this as a signal for a potentially more prolonged rate-hike campaign, moving beyond its initial expectation of 50-100 basis points for the cycle.
This policy adjustment follows a nine-month period where rates remained on hold. The central bank also revised its estimates for both growth and CPI inflation, indicating robust nominal GDP growth that is expected to bolster corporate earnings, even as periods of rate hikes typically see de-rating and risk-off sentiment.
Why Jefferies Favors Large-Caps
Jefferies' preference for large-cap stocks is driven by several factors. The firm highlights that a potential risk-off environment during rate hikes, coupled with better relative valuations and a narrowing earnings growth gap compared to mid-caps, supports their tactical shift. Experience from previous tightening cycles shows a clear correlation between the extent of monetary tightening and valuation compression in the market.
- Valuation Compression: The MSCI India's price-to-earnings (P/E) multiple compressed by 22% from January 2022 to June 2022, during the RBI's accelerated tightening phase. More recently, since August 2026, the multiple has already seen an 8% compression.
- Key Picks: Beyond RIL and Bharti Airtel, Jefferies has recently increased its weight on RIL and added Kotak Mahindra Bank Ltd to its India model portfolio, alongside a general preference for large banks and power utilities.
Economic Outlook and Global Factors
The brokerage notes that the RBI raised its FY27 GDP growth estimate by 0.4 percentage points to 7.1%, following a strong 7.8% growth in 1QFY27. Bank credit growth remains robust at high-teen levels, signaling potential demand-side pressure on inflation.
Regarding inflation, Jefferies points to resurging crude oil prices and weak monsoon rainfall, leading to a 0.2 percentage point increase in FY27E CPI estimates to 5.2%. Core CPI is now projected to rise to 4.4% from 4.3%, against the RBI’s 4% target. The inflation outlook is described as not benign, with CPI expected to reach 5.8% over the next three quarters.
Globally, rising bond yields, with the US 10-year Treasury yield surpassing 5.25%—a more than 20-year high—also play a role. While domestic inflation and growth are primary drivers for Indian rates, the RBI governor has emphasized the importance of the global economic situation in policy considerations.