RBI's Rate Cut Fails to Lift D-Street's Mood as Trade Wars Cast a Bigger Shadow

RBI's 25 bps rate cut call was in-line with what analysts and experts had expected. Yet, MPC's decision failed to uplift the larger D-street sentiment with the benchmark indices closing in red. BSE Sensex dropped over 300 points and concluded the trading session at 73,847 level, whereas NSE Nifty ended below 22,400 mark.

Rate-sensitive sectors like banking and realty also dropped despite the rate cut and central banks' change of stance to 'accommodative'. Nifty Bank, for instance, dropped by around 270 points or 0.54%.

One reason behind the market’s lackluster mood could be that the rate cut was already priced in. Add to that, the overhang of Trump’s trade wars and it’s no surprise the overall investor sentiment stayed low. "When the Governor sitting in the highest chair says he can’t quantify the adverse impact, it tells you the level of unpredictability we are dealing with, is the sentiment echoed across market circles," said Apurva Sheth, head of market perspectives and research, Samco Securities.

The most striking remark came when the RBI governor acknowledged the limits of even the central bank’s own capacity to quantify the full impact of these uncertainties, Sheth said.

The rising case of unpredictability has been quite visible in equity markets. Earlier this week, the fear gauge, Nifty Vix witnessed the sharpest single-day surge, jumping over 65%.

Meanwhile, the CBOE Vix (a gauge of near-term volatility in the S&P 500) surged over 112% in the last 5 trading sessions. The MOVE Index, which tracks volatility in the US bond market, has also witnessed a jump of over 40% so far this month.

The tit-for-tat tariff play, as was evident when the US announced a whopping 104% tariff rate on Chinese imports after the Dragon retaliated by imposing a 34% duty on US goods, deepened concerns over the escalation of trade war.

As for India, while many analysts have pointed out that the overall impact remains less severe as compared to peer economies, the larger supply-chain effect and indirect effects can take a toll on economic growth. The central bank has already revised its growth projections for FY26 to 6.5% from previous estimates of 6.7%.

Still Not in a Better Spot

"Despite the growth forecast downgrade, the RBI’s FY26 GDP forecast of 6.5% still appears optimistic to us. We believe the combination of direct and indirect effects will result in GDP growth slowing more sharply to around 6% in FY26, and risks are skewed to the downside," said Sonal Varma, managing director and chief economist (India and Asia ex-Japan), Nomura.

Analysts also point out that Indian exports are more sensitive to global income/demand rather than price. According to Sakshi Gupta, principal economist at HDFC Bank, a 1% change in global growth results in a 3.4% shift in Indian exports. "A moderation in global growth by 0.8–1% could shave off around 0.3–0.4 percentage points from India’s GDP growth," she noted in a report.

More so, any surprises in the geopolitical sphere or tit-for-tat moves could stir fresh volatility on Dalal Street in the coming few weeks. "India's stance on the US tariff issue, can work to our advantage incase we are able to negotiate well. But given that investors are perturbed by these events, has led to a meltdown in the stock markets, and it might take a couple of months for a clearer picture to evolve. Till such time, investors need to be prepared for enhanced volatility and stay cautious at the same time," said Aamar Deo Singh, senior VP at Angel One.