The Indian stock market resumed its selloff on Wednesday after a two-day relief rally, with Sensex and Nifty dropping up to 0.7% in the morning. All eyes are now on the outcome of RBI MPC meeting, with the market expecting the Indian central bank to hike interest rates.

At 9.43 AM, Sensex slumped over 500 points to drop to 72,560 while Nifty 50 declined over 150 points to trade below 22,650. Broader markets were mixed, with Nifty Midcap 100 in the red and Nifty Smallcap 100 in the green.

Titan shares plunged more than 4% after the company’s Q2 business update failed to impress the market. Asian Paints, BEL, Maruti Suzuki, M&M, Tata Steel, Infosys, TCS, L&T, Axis Bank, UltraTech Cement, Reliance Industries, HUL, Trent, Bajaj Finserv, HCL Tech, Adani Ports, ITC, Power Grid, Tech Mahindra and SBI shares meanwhile dropped around 1% each to emerge as the other top losers on Sensex. Bucking the trend, Bharti Airtel and Bajaj Finance shares traded around 1% higher.

Most of the sectoral indices slipped into the red, with Nifty Auto, Nifty Metal and Nifty Consumer Durables falling more than 1% each. The overall market breadth turned negative, with NSE seeing 1,661 declines against 1,142 advances, while 114 stocks remained unchanged.

Will RBI hike rates today?

RBI Governor Sanjay Malhotra is likely to announce the MPC’s decision to hike rates today, marking RBI's first rate increase in nearly four years. Analysts however believe that the stock market may not be sharply impacted by it after the recent selloff as the hike has already been priced in.

Not rate hike, but RBI’s guidance is what the stock market is really waiting for, said Tanvi Kanchan, Associate Director at Anand Rathi Shares & Stock Brokers. “If the RBI keeps its stance neutral and frames this as a pre-emptive move against imported inflation, markets can live with it. A shift in stance that signals a cycle would be a different conversation,” the analyst said.

The bigger point is that the central bank’s rate decision isn't what's driving this market. Eight straight weeks of losses have come from forces outside India's control, with US 10-year yields above 5.25%, Brent back above $100, and a rupee near 96 to the dollar, Kanchan pointed out. Those three are what keep foreign investors selling, and a domestic rate hike doesn't change any of them. If anything, a hike that defends the rupee could slow the outflows at the margin.

Also Read | Explained: How RBI rate hike may impact Sensex, Nifty after 8-week losing streak

What lies ahead for Dalal Street?

While a 25 bps hike in policy rates is inevitable and already discounted by the market, what is not discounted is the monetary stance and the central bank’s view on the emerging growth-inflation dynamics, said V K Vijayakumar, Chief Investment Strategist, Geojit Investments. Therefore, the analyst feels that the market’s response to the policy would be influenced by the Governor’s comments on the emerging scenario.

“It is important to note that the interest rate differential between India and the US is at very low levels. This is unsustainable. 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 added.

While yesterday’s relief rally stalled on Nifty’s approach to 22,800 on anticipated lines, Anand James, Chief Market Strategist at Geojit Investments is hopeful of extension in uptrend with eyes on 22,930 or 23,100-23,220. That said, dips are to be expected today, according to the analyst.

While Nifty’s inability to float above 22,690 could bring in volatility, James remains hopeful of resumption of upswings as long as dips are restricted to 22,574. “We do not expect a collapse or a stretch beyond 22,050 for now."

Also Read | RBI to hike repo rate by 25 bps? These rate sensitive sectors will be in focus on Wednesday

Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.