Stock Market Crashed After RBI's 25 Bps Rate Cut; Why Sensex, Nifty Are Falling On February 7?

Stock Market After RBI Rate Cut: Sensex and Nifty reacted volatile to the latest 25 bps rate cut by RBI which is for the first time in five years. Indian stock market crashed soon after the policy outcomes with Sensex falling below 77,800 levels and Nifty erasing the 23,500 mark. Despite the rate cut being on expected lines, it is the RBI's GDP target which was lowered that sent investors jittery.

Sensex:

Sensex held around 78,300 levels after RBI's new governor Sanjay Malhotra commenced his first bi-monthly monetary policy speech. The market traded cautiously even when the rate cut was announced. However, after the target of GDP growth for upcoming quarters was lowered that escalated a selloff.

The 50-scrip benchmark dropped by 327.79 points to hit an intraday low of 77,730.37. Currently, Sensex is struggling to hold a 77,800 pattern.

Stocks like ITC, Power Grid, SBI, Bajaj Finance, Hindustan Unilever, TCS, and Reliance were top laggards.

Nifty 50:

Nifty was above 23,650 levels when the RBI policy speech started. However, after a few minutes, the index followed its counterpart, to fall by 109.75 points to hit an intraday low of 23,493.60. Bank Nifty she over 271 points or 0.5%. Nifty Midcap 100 and Nifty Smallcap 100 index dropped by 1% each.

Nifty PSU Bank was down by 1.2%, while Nifty Media shed nearly 2%. Nifty Oil & Gas index also fell by 1.2%. The majority of indices were in the red.

RBI Policy Outcomes:

The six-member MPC reduced the policy repo rate by 25 basis points for the first time in five years, taking the key rate to 6.25% from the previous 6.5%. This also halted the status quo of 11 consecutive policies from February 2023 to December 2024 under former governor Shaktikanta Das' regime. Das had hiked the repo rate by 250 bps from May 2022 to February 2023 due to extreme inflationary pressure before pausing for two years.

On February 7th, RBI announced that it sees GDP growth for 2025-26 at 6.7%, which is slightly lower than the upper estimate of 6.8% announced by the Economic Survey.

The Economic Survey 2024-25 predicted GDP growth between 6.3% to 6.8% for FY26.

Furthermore, RBI trimmed its GDP target for Q1 of FY26 to 6.7% from earlier 6.9%, and the target was lowered to 7% for Q2 compared to 7.3%. For Q3 and Q4, RBI expects GDP growth at 6.5% each for FY26.

CPI inflation for 2025-26 is projected at 4.2% for FY26, while the target for Q1 is mildly lowered to 4.5% from earlier 4.6%. The Q2 target is kept unchanged at 4%, while the Q3 target is at 3.8%; and Q4 at 4.2%.

Meanwhile, Dr V K Vijayakumar, Chief Investment Strategist, at Geojit Financial Services said, since a 25 bp rate cut is partly discounted by the market, there can be a sell-off if the rate cut doesn't materialise.

There is only limited upside for the market since the FIIs have gone back to selling mode after one day of symbolic buying. Apart from financials, IT and pharma stocks will continue to be the focus of DIIs, Vijayakumar added.

Furthermore, experts don't see a rate cut in next meeting. Suresh Darak, Founder, Bondbazaar said, "As expected, RBI has cut the benchmark rate by 25 basis points, while maintaining a neutral stance, aligns with our expectations. The central bank has set an inflation target of 4.8% and we don't anticipate another rate cut in the next meeting."

Darak added, "The RBI acknowledged the system's liquidity deficit and committed to providing liquidity as needed. On the currency front, they've chosen not to set a specific target, instead focusing on preventing excessive volatility."