Benchmark indices Sensex and Nifty gave up their early trading gains on September 30 and closed 400 points and 120 points lower from day's high, respectively.
On September 30, Sensex closed 97.32 points or 0.12% lower at 80,267.62, and the Nifty settled 23.8 points or 0.1% lower at 24,611.10. About 1,970 shares advanced, 1,939 shares declined, and 153 shares were unchanged.
Here are three key reasons behind the sharp market reversal:
1) Jitters ahead of RBI rate cut decision
Traders are cautious ahead of Reserve Bank of India's Monetary Policy Committee's decision on rate cut, scheduled to be announced on October 1. MPC is likely to maintain the status quo on interest rates in its October review, a Moneycontrol poll of 15 economists, bank treasury heads and fund managers has found.
"The monetary policy expected on October 1st is unlikely to surprise. The present growth-inflation dynamics do not warrant a rate cut. Therefore, the RBI is likely to hold rates while sending a dovish message to support the growth momentum in the economy," said VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited.
Bank Nifty fell 250 points from day's high on September 30 even as RBI eased lending norms while tightening oversight on lenders. Nifty PSU Bank index closed 1.8% higher and also posted its best month in two years.
"RBI's move improves rate transmission, broadens gold-based lending and relaxes capital norms, which can aid credit flow and capital access," ICICI Direct said in a note.
2) Persistent FII selling
Sustained selling by foreign investors is also contributing to the bearish sentiment on markets, which have been falling since the past seven sessions.
"The near-term market structure appears weak. Sustained FII selling and absence of positive triggers are preventing any strong recovery in the market. Any attempt to climb up is facing selling pressure. This is evident from the negative closing yesterday despite the positive institutional inflow of above Rs 1,000 crore," said Vijayakumar.
"We believe oversold positions after the recent sell-off may now lead to some consolidation in the Nifty 50, with strong support around the 24,400-24,500 zone," said Ajit Mishra, senior vice president of research at Religare Broking.
However, foreign selling amounting to $2.55 billion this month and caution ahead of the central bank policy may continue to cap gains, Mishra said.
3) Weak global cues
Weak global cues also contributed to the bearish sentiment in the markets.
Caution prevailed in world markets on Tuesday, with the dollar and equities slipping and gold hitting another record high amid fears a U.S. government shutdown could delay key jobs data.
The dollar was broadly weaker, European stocks were lower in early trade and U.S. equity futures fell a day after US Vice President JD Vance said the government appeared "headed to a shutdown" after little progress in budget talks between President Donald Trump and Democratic opponents.
A government closure would delay the issue of Friday's key employment numbers, putting the spotlight on the Labor Department's JOLTS report on August job openings due later on Tuesday. It could also complicate the outlook for the Federal Reserve, which cut rates earlier this month.
The pan-European STOXX 600 index was last down around 0.2%, while Japan's Nikkei closed down 0.25%. MSCI's broadest index of Asia-Pacific shares outside Japan, however, rose almost 0.5%, poised for a gain of over 5% this month.
Wall Street Futures were trading lower with Dow and S&P 500 Futures trading 0.2% lower each. Nasdaq Futures were trading 0.18% lower.
With inputs from Reuters
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