RBI’s Monetary Policy Decision Triggers Sharp Decline in Indian Stock Markets

By IndraStra Global News Team

On February 8, India's benchmark stock market indices experienced a notable plunge following the announcement by the Reserve Bank of India (RBI) Governor regarding the central bank’s Monetary Policy Committee (MPC) decision to keep the key interest rates unchanged. During the MPC meeting held from February 6 to 8, the committee voted 5:1 in favor of maintaining the repo rate at its current level. Additionally, the MPC chose to retain the 'withdrawal of accommodation' stance rather than transitioning to a 'neutral' stance.
As the news broke, the S&P BSE Sensex witnessed a staggering decline of 584.53 points, resting at 71,567.47 by 11:30 am. Concurrently, the NSE Nifty50 also followed suit, plummeting by 164.40 points to reach 21,766.10. This unexpected downturn reverberated across broader market indices, amplifying the concerns among investors and analysts alike.
While the decision itself aligned with the anticipations of many market observers, the MPC's steadfast commitment to the "withdrawal of accommodation" stance dampened investor optimism regarding the likelihood of an imminent rate cut. Consequently, the impact of this announcement rippled through various sectors, notably affecting bank and financial services stocks, which had initially shown promise at the commencement of the trading session. The Nifty Bank registered a decline of 0.9 percent, while the Nifty Financial Services sector experienced a more pronounced drop of over 1 percent.
Analysts point to the persisting tightness in liquidity within the banking system as a significant contributing factor to the market downturn. The RBI's unwavering focus on curbing inflation to achieve the targeted 4 percent mark suggests a prolonged period of constrained liquidity, further underscoring the rationale behind the observed decline in bank and financial services stocks during intraday trading.
Suman Chowdhury, Chief Economist and Head of Research at Acuite Ratings & Research remarked on the MPC's decision, stating, "It was no surprise that RBI MPC decided to keep the status quo on the interest rates for the sixth consecutive time. However, RBI continued to sound hawkish as against the market expectations and has not provided any indication of the timing of the change in monetary stance from withdrawal of accommodation." 
Echoing similar sentiments, Madhavi Arora, Lead Economist at Emkay Global Financial Services, emphasized the influence of global factors on the RBI's decision-making process. Arora highlighted the likelihood of the RBI aligning its actions with those of the US Federal Reserve, suggesting that rate cuts from the RBI may follow those of the Fed.
In light of concerns regarding high food inflation, Rajani Sinha, Chief Economist at CARE Ratings, emphasized the importance of cautious monetary policy. Sinha noted the possibility of a shallow rate cut by the RBI in the latter half of the year, particularly as inflationary pressures ease and the US Fed considers rate reductions. 
Similarly, Sujan Hajra, Chief Economist & Executive Director at Anand Rathi Shares and Stock Brokers, expressed a cautious outlook, suggesting that any rate cuts by the RBI are unlikely in the near future. With the RBI projecting an inflation rate of 4.5% for FY25, Hajra indicated that expectations for rate cuts in the current year are diminished.
Samrat Dasgupta, Chief Executive at Esquire Capital Investment Advisors, conveyed his disappointment with the RBI's policy decision, noting that the central bank's indication of refraining from rate adjustments until consumer price inflation falls below the 4 percent threshold was particularly disheartening for the markets. Dasgupta emphasized, "It was disappointing for markets as RBI clearly said it will not bring down rates until consumer price inflation fell below its target of 4 percent."
The repercussions of the MPC decision reverberated across specific banking entities, with shares of Axis Bank and ICICI Bank witnessing a decline exceeding 2 percent each, while Kotak Mahindra Bank recorded a nearly 2 percent drop. Additionally, HDFC Bank experienced a decline of approximately 1.3 percent, reflecting the market sentiment following the RBI's announcement.
The ripple effect extended beyond the financial sector, manifesting weaknesses observed within Fast-Moving Consumer Goods (FMCG) stocks. The Nifty FMCG index, indicative of this sector's performance, tumbled by over 1.2 percent during the trading session, compounding the broader market downturn.
Economists emphasize a tempered outlook, suggesting that the RBI is unlikely to deviate from its current stance or implement rate cuts until the latter half of the fiscal year 2024-2025. This projection underscores the prevailing cautious sentiment in the financial markets in light of the central bank's policy trajectory.
Investors and stakeholders are preparing for continued uncertainty as the market adjusts to the RBI's decision. Although the decision to maintain interest rates may demonstrate the central bank's dedication to controlling inflation, the immediate aftermath highlights the challenge of balancing monetary policy in a constantly changing economic climate.

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