RIL, Bharti Airtel, largecap banks, power stocks: Jefferies’ top picks as rate hike cycle begins

Jefferies in its latest strategy note said largecaps are better placed as the Reserve Bank of India (RBI) begins a rate-hike cycle, naming Reliance Industries Ltd, Bharti Airtel, large-cap banks and power utilities as its preferred picks. The global investment bank said experience from earlier rate-hike cycles showed a correlation between the extent of tightening and valuation compression, and added that the risk-reward is now more favourable for largecaps.

"With rate-cut cycles driving de-rating / risk-off sentiments, we maintain our tactical shift to large-cap call. Large banks, RIL, Bharti, Power are key OWTs," Jefferies said, days after it added Kotak Mahindra Bank Ltd to its India model portfolio.

The global investment bank said the RBI’s 25 basis points hike in benchmark rates was widely anticipated, but the shift in stance to 'calibrated tightening' has raised concerns about a longer tightening cycle. It also noted that the RBI raised its estimates for both growth and CPI inflation, indicating strong nominal GDP growth that should support corporate earnings, even as de-rating and risk-off sentiment tend to surface during periods of rate hikes.

Jefferies said MSCI India’s price-to-earnings multiple compressed 22 per cent from its peak in January 2022 to June 2022, when the RBI began an accelerated tightening cycle.

Earlier, during the narrower 50 basis points rate-hike cycle in 2018, MSCI India P/E compression was about 7 per cent. Since August 2026, Jefferies noted that the multiple has already compressed about 8 per cent.

The global investment bank said a potential risk-off environment during rate hikes, better relative valuations and a narrowing earnings growth gap versus midcaps support its preference for largecaps. It said it had recently raised the weight on RIL and added KMB to its model portfolio, while also preferring large banks, Bharti and power utilities.

Jefferies noted that the India-US 10-year yield differential is now near 20-year lows, but said the inflation differential has also narrowed sharply over the past 10 years. India’s CPI inflation averaged about 6.1 percentage points above the US during FY07-FY16, compared with about 1.5 percentage points in FY17-FY26, suggesting that a lower yield premium over US Treasuries can persist.

Even so, Jefferies said it expects this tightening cycle to remain shallower than the 2022 episode, when the RBI raised rates by 250 basis points following policy normalisation and a crude-led inflation spike.

On policy, Jefferies described the RBI’s move as hawkish. After being on hold for the last nine months, the central bank raised the benchmark repo rate by 25 basis points to 5.50%, with a unanimous decision by the Monetary Policy Committee. The MPC also changed its stance from 'neutral' to 'calibrated tightening' in a 4-2 vote, which Jefferies said was being read as a signal of a more prolonged rate-hike campaign. It now believes the RBI could raise rates at the upper end of its earlier 50-100 basis points expectation, with 25 basis points already delivered.

The brokerage said a combination of resurging crude oil prices and weak monsoon rainfall led to a 0.2 percentage point increase in FY27E CPI estimates to 5.2 per cent. Core CPI is now forecast to rise to 4.4 per cent from 4.3 per cent, against the RBI’s 4 per cent target. It said the inflation outlook had been described as not benign, with CPI expected to rise to 5.8 per cent over the next three quarters.

Jefferies said the RBI raised its FY27 GDP growth estimate by 0.4 percentage point to 7.1 per cent, after 1QFY27 GDP growth for the June quarter came in at 7.8 per centand other economic data remained reasonably strong. It also noted the governor’s comment that bank credit growth was near all-time highs and sustaining at high-teen levels. The policy statement, it said, also pointed to possible demand-side pressure on inflation.

The note also flagged the global bond market backdrop. Jefferies said global yields have been rising, with the US 10-year Treasury yield above 5.25 per cent, a more than 20-year high, and similar moves seen in other developed markets. While domestic inflation and growth remain the main drivers for rates, it said the governor had also placed some emphasis on the global situation.