Sensex, Nifty recovery attempt falters after RBI rate hike; is further caution warranted?

Indian equity benchmarks on Wednesday gave up their early rebound attempt after Reserve Bank of India (RBI) raised the benchmark repo rate by 25 basis points (bps) to 5.5 per cent, snapping their two-day upward move. The repo rate is the interest rate at which RBI lends money to commercial banks.

The 30-share BSE Sensex pack plunged 429.11 points or 0.59 per cent to settle at 72,638.70, while the broader NSE Nifty index declined 173.05 points or 0.76 per cent to close at 22,603.05.

On the sectoral front, metal remained the biggest drag, followed by realty, auto, IT and consumer, while PSU banks and media ended with modest gains. Meanwhile, the broader indices traded mixed, with Nifty Midcap100 declining 0.63 per cent, while Nifty Smallcap100 gained 0.30 per cent.

Ajit Mishra, SVP – Research, Religare Broking, said, "Markets reversed the recent gains on Wednesday and ended lower amid volatility, weighed down by a combination of domestic and global factors. After a weak opening and an initial recovery attempt, the benchmark indices failed to sustain their gains and oscillated within a narrow range."

Mishra also said, "The overall market tone remained neutral following the RBI's widely anticipated rate hike, with the stronger growth outlook initially supporting rate-sensitive sectors like banking. However, sentiment softened as investors weighed the higher inflation outlook and shift to a calibrated tightening stance, keeping the broader market mood cautious. Global macro concerns added to the pressure, with Brent crude rebounding above $101 a barrel, while continued foreign outflows, elevated global bond yields and rupee weakness remained key overhangs for domestic equities."

Vinod Nair, Head of Research at Geojit Investments, said, "With the RBI delivering the rate hike on expected lines, the domestic market reacted more sharply to the shift in policy stance from neutral to calibrated tightening, which signals a turn in the rate cycle. While the upward revision to growth projections reaffirmed the strength of domestic fundamentals, the higher inflation outlook and RBI's emphasis on price stability tempered sentiment."

Nair added, "Ahead of the US FOMC meeting, the rupee remained under pressure amid rising US yields, a stronger dollar and continued FII outflows, adding to the market decline. Sectorally, banking stocks bucked the broader weakness on expectations of margin benefits from a higher-rate environment, while selling pressure remained widespread across most pockets of the market."

Looking ahead, Nair further said, "Market focus will turn to the September-quarter earnings season for further direction. A resilient macroeconomic backdrop supports headline expectations, but investors will watch management commentary closely for evidence on whether the companies can absorb rising input costs, retain pricing power and sustain demand through the second half of the fiscal year."

Ankur Punj, Managing Director at Equirus Wealth, noted, "Cautious sentiment prevailed throughout the session after RBI raised the repo rate by 25 bps to tame rising inflation, resulting in fresh selling across rate-sensitive and other sectors. With the central bank indicating a hawkish stance going ahead, the market fears that further rate hikes, a prolonged war, and higher crude oil prices could hurt growth prospects in the medium to long term."

Nifty outlook

Sudeep Shah, Head of Technical and Derivatives Research at SBI Securities, said, "The 22,460–22,440 zone could act as immediate support for Nifty. A decisive break below this zone could revive selling pressure and trigger further correction towards 22,300. On the upside, 22,730–22,750 could act as an immediate hurdle. A sustained move above this zone could extend the pullback rally towards 22,900. The broader structure remains cautious."