Today's rate cut was expected by traders but they had higher hopes from Raghuram Rajan, the Reserve Bank governor.
The benchmark Sensex was down 1.5 percent, and the Nifty fell as much as 1.6 percent, after news of the rate ease. Rajan said that further cuts are uncertain and depend on the impact of the monsoon as well as how well the government responds to inadequate rains.
The meteorological department has cut its forecast of monsoon rains, raising fears of a drought in India where half of agricultural lands lack irrigation.
The stock market had hoped for more clarity about when a future cut might happen. The RBI cut its policy interest rate by a quarter percentage point in its third easing, this year. Rajan said he would wait for more data because of inflationary trends such as a poor monsoon and recovery in global crude prices — both factors can push up food prices in India — and performance of the rupee at a time when global markets are volatile.
"The 25 bps cut was already priced in. The market is disappointed with the central bank's subdued outlook for inflation and GDP growth," said Gaurang Shah, vice-president, Geojit BNP Paribas.
Market sentiment was also hurt by lack of any fresh measures to free up cash-strapped commercial banks' liquidity, which bankers had said were needed for them to lower lending rates further and pass on the benefits of monetary easing to the broader economy.
“The policy today is neither conservative nor aggressive,” Rajan said in a press conference, adding that further moves will depend on data. “It’s a Goldilocks policy, just right for the existing situation.”
The next cut might take longer to come.
“Today is the last cut before it pauses for some time,” said Suvodeep Rakshit, an economist at Kotak Securities Ltd. in Mumbai. “At least for the next three months I don’t think they are looking at any kind of easing.”
Still, today's cut would help if banks pass it on. Latest government data shows exports dropping for a fifth straight month, factory output at a five-month low and non-performing assets — or bad loans — rising to their highest level since 2001. Car sales, a barometer of economic growth, rose just 1.9 percent in April compared with a 7 percent rise a year ago.
Rajan held out hope that if key metrics perform well, he might still be able to cut rates again.
"Going forward, room may absolutely open up if the monsoon is better than expected or government action can mitigate any potential rise in food prices and if energy prices stay contained," he said. "Clearly, it is possible more room may open up and we will take full advantage of it."
(With agency inputs)