What explains the sharp 600 point crash in the Sensex on Monday 03 August?

It was almost like a Black Monday for the indices. The Sensex crashed by 600 points on Monday led lower by Reliance and other heavyweight financial stocks. Even as Coronavirus cases were on the rise, the markets were also worried that the RBI may have second thoughts on the rate cut due to concerns over inflation that has stayed up despite weak GDP and IIP growth in the last few months.

One of the key conditions for sustained rate cuts by the RBI has been inflation in the range of around 4%. However, CPI inflation has been in the range of above 7% consistently for quite a few months now. The dilemma is that if the RBI cuts rates further then the real yields on bonds will slip deeper into the negative. That would make Indian bonds attractive to FPIs and induce more debt selling.

On Monday, Reliance dropped by 2.83% and that had its impact on the market overall. RIL has been under pressure after a number of large brokers downgraded the stock. Financial stocks also corrected on the fear that the EMI moratorium may be extended considering the slow recovery. The VIX shot up above the 25 mark on Monday, indicating that there was a sense of panic building up in the market.