RBI turns hawkish on inflation, but rate hikes could test growth momentum
Second, capex, an important driver of Q1FY27 growth, which is growing at 11.9%, is sensitive to rate hikes through the cost-of-capital channel, especially for MSME capex programs. While larger firms typically fund a big share of their capex using retained earnings, it does not make those capex plans immune, either. Cost of utilising retained earnings rises with yields, but most importantly, if demand is expected to weaken due to tighter policy, then capex may not be profitable in the first place.
