Why is the stock market declining today? The Sensex drops 500 points following the RBI MPC

The Indian stock market experienced a sharp and volatile reaction following the Reserve Bank of India’s (RBI) announcement of a 25 basis point rate cut, lowering the key lending rate to 6.25%. Although the move was largely anticipated, the markets fluctuated dramatically, reflecting investor uncertainty over the central bank’s future monetary policy direction.

The session witnessed extreme swings, with the S&P BSE Sensex initially dropping nearly 200 points before surging over 200 points, only to tumble more than 500 points later in the day. As of 2:43 PM, the Sensex was down by 539.72 points, settling at 77,516.79, while the NSE Nifty50 declined by 147.50 points to 23,455.60.

Sector-wise, PSU banks and FMCG stocks bore the brunt of the selloff, with most sectoral indices trading in the red. The disappointment stemmed from the RBI's decision to maintain a neutral stance on future rate cuts, leaving investors uncertain about the possibility of further monetary easing in the near term.

Why Is the Stock Market Falling Today?

1. Rate Cut Was Already Priced In

Market experts pointed out that the RBI’s decision did not come as a surprise, as it was widely anticipated and factored into stock prices well in advance. Given this, the announcement failed to ignite bullish sentiment, as traders had already positioned themselves accordingly.

"It was widely expected that the RBI would deliver a rate cut, so the market has not reacted much to it. In fact, India’s 10-year bond yields have spiked, as the committee unanimously voted to maintain a neutral stance. We believe that this rate cut is a step in the right direction. However, the size and timing of further rate cuts will depend on how the US Federal Reserve moves forward," said Apurva Sheth, Head of Market Perspectives at SAMCO Securities.

2. Profit Booking After Recent Gains

The Nifty had rallied significantly in the days leading up to the rate cut announcement, surging 500-700 points in anticipation. This led to aggressive profit booking as traders looked to capitalize on the gains.

"Over the last few days, in anticipation of the rate cut, the markets have rallied. After the announcement, we saw profit booking during the intraday session. Once the Nifty broke the 23,500 support level, selling pressure increased. However, as long as the market stays above 23,000, the medium to short-term outlook remains positive," said Kranthi Bathini, Director of Equity Strategy at WealthMills Securities.

According to Bathini, the market is currently undergoing technical adjustments, with profit booking accelerating after Nifty fell below the key 23,500 mark. However, he emphasized that the overall sentiment remains bullish in the medium term.

3. Weakness in Banking and FMCG Stocks

• PSU banks suffered heavy losses, as rate cuts typically compress net interest margins, affecting profitability. Investors also appeared cautious about the broader impact of lower interest rates on the banking sector.
• FMCG stocks saw notable declines, with investors booking profits after their recent strong performance. Companies in this sector, which rely heavily on consumer demand, faced selling pressure despite hopes that lower interest rates could boost consumption.

4. Bond Market Reaction

India’s 10-year bond yields rose following the RBI’s decision, signaling that bond investors were not fully convinced by the move. The increase in yields suggested that market participants expect inflationary pressures to persist, limiting the scope for aggressive monetary easing.

Market Outlook

With the rate cut announcement now behind us, market participants will shift their focus to global cues, corporate earnings, and the US Federal Reserve’s policy stance. While short-term volatility may persist, analysts believe that as long as Nifty remains above 23,000, the broader market trajectory remains positive.

Technical analysts suggest that if Nifty manages to reclaim the 23,500 level, an upward move toward 23,900 could be possible. However, if selling pressure continues and the index slips below key support levels, sideways consolidation or further downside cannot be ruled out.

For now, investors are advised to remain cautious, adopt a stock-specific approach, and closely monitor global macroeconomic developments, particularly movements in crude oil prices, US interest rates, and geopolitical risks.