Sensex drops following RBI's hawkish stance in Monetary Policy

The Reserve Bank of India's (RBI) latest monetary policy committee (MPC) announcement has led to a downturn in the Sensex index, as investors respond to the unexpectedly hawkish tone. According to V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the MPC's decisions regarding rates, stance, and overall sentiment have aligned with market predictions. While the interest rates and stance have been maintained, the noteworthy shift is the adoption of a more cautious stance, signaling potential future rate hikes.

One prominent alteration is the upward revision of the projected Consumer Price Index (CPI) inflation for the fiscal year 2024, now standing at 5.4% instead of the initial 5.1% estimate. This adjustment implies a sustained period of elevated policy rates, potentially postponing any rate cuts until the first quarter of fiscal year 2025. Vijayakumar suggests that the policy announcement doesn't hold any significant surprises for the market, either positive or negative.

Ajit Kabi, a banking analyst at LKP Securities, noted that the RBI has opted to maintain the policy rate at 6.5% in the recent MPC meeting. Kabi believes that inflation, except for the Consumer Price Index (CPI), should not be a cause for concern.

The FY24 CPI forecast has been raised to 5.4% from the initial estimate of 5.1%, Kabi added. Additionally, the projection for real GDP growth was set at 6.6%. He highlighted that the RBI's MPC remains steadfast in its commitment to align inflation with the 4% target and to anchor overall inflation expectations.

In response to the RBI policy announcement, the BSE Sensex has experienced a decline of 326 points, reaching a level of 65,669 points. This has had a particularly notable impact on certain stocks, with Asian Paints seeing a decrease of over 2%, while Tata Motors and Nestle have both experienced declines exceeding 1%.