Sensex down 500 points, Nifty plunges: Why is market falling after RBI rate hike?

Markets traded in red and came under pressure on Wednesday after the Reserve Bank of India raised the repo rate by 25 basis points, with the Sensex falling nearly 500 points and the Nifty declining over 0.8%.The market reacted negatively to the RBI's shift in policy stance from “neutral” to “calibrated tightening”, while rising crude oil prices, continued foreign selling and a weaker rupee added to the pressure.The Sensex was at 72,592.27 at 2:50 pm, down 475.54 points or 0.65%. The index opened at 72,965.38 and touched an intraday low of 72,468.72. The Nifty 50 was at 22,590.25, down 185.85 points or 0.82%. It opened at 22,690.45 and fell to an intraday low of 22,546.30.The fall came after a strong two-session rebound. The Nifty had gained around 558 points from last Thursday's low before Wednesday's decline, according to Dr V K Vijayakumar, Chief Investment Strategist at Geojit Investments. WHY ARE MARKETS FALLING AFTER RBI RATE HIKE?The RBI raised the repo rate by 25 basis points to 5.50%, its first rate hike since February 2023. More importantly, the central bank changed its policy stance from “neutral” to “calibrated tightening”.That change has raised concerns that Wednesday's rate hike may not be a one-off move and that further tightening could follow if inflationary pressures remain elevated. The RBI's decision comes against a backdrop of higher crude oil prices, Middle East tensions, rising global bond yields and a weak rupee.Dr V K Vijayakumar said the 25-basis-point hike was already largely discounted by the market, but the RBI's stance and its assessment of the growth-inflation outlook were more important for investors.“The 558 point rally in the Nifty from last Thursday’s low level has come as a relief for investors. But this rally will face headwinds, constraining a sustained up move,” Vijayakumar said.He added that domestic liquidity and expectations of good Q2 numbers remain supportive, but there has been no clear reversal in foreign portfolio investor outflows.RBI'S 'CALIBRATED TIGHTENING' STANCE WORRIES INVESTORSThe change in stance was a key reason behind the market's negative reaction.The RBI has shifted from a neutral position towards calibrated tightening as it assesses the impact of higher oil prices, inflation and global monetary policy tightening.For investors, this signals that the central bank is now more focused on containing inflation risks, even as it continues to assess domestic growth.Rajesh Sharma, Managing Director, Capri Loans, said the RBI's decision reflects its focus on inflation and macroeconomic stability.“The RBI’s decision to raise the repo rate by 25 basis points to 5.50% reflects a clear priority towards controlling inflation and maintaining macroeconomic stability,” Sharma said.He added that higher rates could gradually moderate consumption, investment and credit demand, although the underlying resilience of domestic demand and financial-sector fundamentals remain supportive.RUPEE NEARS RECORD LOW, CRUDE RISESThe rupee also came under pressure after the RBI policy decision. It fell to 96.8450 per dollar, moving closer to its record low of 96.96 hit in May.RBI Governor Sanjay Malhotra said financial markets can be irrational in the short term and suggested that the rupee could be undervalued based on several measures, including the real effective exchange rate.He also said the RBI would work to ensure that the rupee stabilises and moves in an orderly manner.At the same time, Brent crude was trading at around $102.01 a barrel, up 1.42%, while WTI crude was at $90, up 0.63%.Higher crude is a major concern for India because it can increase inflationary pressure, widen the import bill and put additional pressure on the rupee.Vijayakumar said the interest-rate differential between India and the US is already very low.“A rate hike to preempt further capital flight has become unavoidable in the context of rising US yields and rising dollar. Therefore, stabilisation of the rupee also will be on top of the RBI Governor’s mind even though the focus will be on growth-inflation dynamics,” he said.RATE-SENSITIVE STOCKS UNDER PRESSUREThe RBI decision hit several rate-sensitive sectors, particularly real estate and consumer-facing stocks.The Nifty Realty index fell 1.72%, while consumer durables declined 1.43%. Auto stocks fell 1.43%, FMCG declined 1.04% and financial services ex-bank fell 0.19%.The Nifty Financial Services 25/50 index was down 0.22%, while the Nifty MidSmall Financial Services index fell 0.27%.However, banks were relatively more resilient. The Nifty PSU Bank index rose 0.92%, while the private bank index gained 0.13%.This is in line with the view that higher floating lending rates could support bank margins.TITAN SHARES CRASH 4%Titan was among the biggest losers on the Sensex, with the stock falling 3.67% to Rs 4,373.50.The stock hit a three-month low after the jewellery retailer reported slower growth in its mainstay jewellery business in the September quarter. Analysts attributed the slowdown partly to a shift in the festive calendar and a high base from the previous year.Titan's weakness added to the pressure on the benchmark index, particularly as investors reassessed the company's growth after several quarters of strong performance.MARKET FALL IS BROAD-BASEDThe decline was broad-based, with most major sectoral indices in the red.The Nifty 100 fell 0.81%, Nifty 200 declined 0.78% and Nifty 500 dropped 0.67%. The Nifty Midcap 50 fell 0.80%, while the Midcap 100 declined 0.66%.The Nifty Smallcap 100, however, was up 0.31%.Among the major sectors, metals fell 2.29%, realty declined 1.72%, consumer durables dropped 1.43%, auto fell 1.43% and IT declined 1.39%.Nifty FMCG fell 1.04%, while oil and gas declined 0.56%.The Nifty Media index gained 1.04%, while PSU banks rose 0.92%.WHAT DOES THE RBI RATE HIKE MEAN FOR BANKS AND NBFCs?The impact of the rate hike is likely to differ across financial companies.Rajesh Sharma said higher rates could moderate credit demand over time, although he expects the financial system to remain strong enough to meet the credit needs of businesses and households.Ajai Shukla, MD & CEO, PNB Housing Finance, said the 25-basis-point hike and change in stance provide greater clarity on the policy direction.For housing finance companies, he said the fundamentals remain constructive because credit growth remains strong and the domestic housing market continues to benefit from rising incomes, urbanisation and demand from first-time homebuyers.On the other hand, higher rates can put pressure on NBFCs because their funding costs may rise faster than the yields on some loans.Bruce Keith, Co-Founder & CEO, InvestorAi, said the rate hike was widely expected given geopolitical risks, crude prices, inflation and the weak rupee.“Of more importance is the signalling change from ‘neutral’ to ‘calibrated tightening’ suggesting further increases to come,” Keith said.He added that higher rates could hurt richly valued segments first, particularly small- and mid-cap stocks.The RBI rate hike itself was largely expected. The bigger concern for the market is whether the shift towards calibrated tightening marks the beginning of a longer rate-hike cycle.Investors will now track the RBI's inflation and growth outlook, the rupee, crude oil prices, foreign fund flows and upcoming Q2 earnings.The market had already fallen sharply before Wednesday's policy decision, with the Nifty down around 7.5% since the RBI's August 5 policy pause. The recent two-session recovery had offered some relief, but rising crude, FPI selling and the RBI's new policy stance have brought the focus back to the key risks facing equities.For now, the market's response suggests that investors were looking beyond the expected 25-basis-point rate hike and focusing more closely on what the RBI's changed stance could mean for future monetary policy.(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)- Ends