The optimism that has held the Indian stock markets together so far amid the brutal second wave could well be misplaced.
- Indian Stock Market seems impervious to the Covid-19 second wave defying old norms and sentiments associated with the markets.
- The reason for the rally in markets could be increased investor optimism over India’s immunization drive and hope of reaching the peak of Covid-19 second wave soon.
- However, caution is warranted. So much about the second wave is still unknown.
With new daily infections in the ballpark of 4 lakh and the number of deaths rising everyday despite purported underreporting by authorities, the health infrastructure and economic stability in India are seen crumbling by the minute. Hospitals running out of oxygen, pharmacies running out of medicine stock, people running out of savings to dip into, businesses bleeding dry, vaccination centers shuttered due to shortages – wherever you look, it’s the same story of devastation unfolding. Except for India’s stock markets.
Despite the short- and long-term economic repercussion of this destructive second Covid-19 wave, the stock markets have held ground steadily. So far, the benchmark Nifty 50 Index has witnessed a marginal dip of 5 percent since February. Just last week, Sensex closed at 49,765 points on Thursday, having gained 1,887 points – a 3.9 percent jump – in four trading sessions.
These trends have left economic experts as well as average citizens wondering: why aren’t Indian stock markets crashing in response to the Covid-19 catastrophe?
Watch: Why the Indian Stock Market is immune to the second Covid wave
Market Resilience rests on Optimism
Market players seem to be drawing solace from the hope that things will normalize once this wave peaks, coupled with the fact that the central government has steered clear of a strict clamp down like last year’s lockdown. Besides, based on the responses taken by companies in 2020, investors know that businesses will do whatever it takes to mitigate their losses – from idling operations to job and pay cuts – and whatever money they save in the process will gravitate toward stocks.
In addition, the precedence of authorities stepping in to prevent rampant economic devastation through state-guaranteed loans, moratoriums and liquidity-fuelling measures has served as a morale boost. Sure enough such economic measures are already in the making. The Reserve Bank of India last week announced repayment relief, along with 500-billion rupees in the form of a three-year funding at 4% policy rate to enable banks to assist vaccine manufacturers, oxygen suppliers and hospitals.
All in all, the market resilience seems to rest on optimism drawn from how things panned out during the first Covid-19 wave in 2020.
Are the Markets Detached from Reality?
At a time when everyone – be it on an individual or organizational level – is in survival mode, the rally at the stock market is surprising. It could well be because the markets are operating detached from the ground realities. In a bubble of its own making. While long-term economic projections are linked to market positivity, it cannot be denied that its rise and fall is driven directly by the daily news cycles.
With their current trends, the Indian stock markets seem to be defying this age-old norm. The optimism on which the markets have built their stability seems to have completely overlooked a basic ground reality – the second wave of 2021 is panning out nothing like 2020. Last year, one of the worst fall outs of the lockdown measures taken to rein in the pandemic were the mass migrations of migrant labourers and their families.
But the healthcare infrastructure wasn’t overwhelmed to a point of collapsing. What’s worse, this year, the virus is making inroads into India’s rural areas. This means that the very places which offered a safe haven to our most vulnerable population may now be ravaged by the pandemic with far from adequate means to cope with it. A lacking vaccination drive – with merely about 2 percent of the population fully vaccinated so far – makes this already precarious situation potentially volatile.
What’s Keeping the Markets Afloat?
While the market rally began in October 2020 with an influx of funds from foreign portfolio investors (FPIs), it has been retained by domestic institutional investors (DIIs) — which includes insurance companies and mutual funds, among others. By April, DIIs had already invested a total of Rs 9,669 crore vis-à-vis the Rs 11,101 crore net outflow by FPIs.
The data reflects that it is the first time since October 2020 that DIIs have surpassed FPIs in their net investment. In sharp contrast, in the span of five months between October 2020 and March 2021, it was the FPIs that pumped the Sensex by over 31% with a net investment of Rs 1.97 lakh crore. During this time, the DIIs were focused on selling, pulling out a whopping Rs 1.31 lakh crore from domestic equities.
Now that FPIs are exercising caution, given the precarious Covid situation, domestic investors have kept the stock markets from plummeting, placing their hopes on the government to mitigate the economic fall-out of the second wave that continues to rage unabated.
Caution is Warranted
The optimism that has held the Indian stock markets together so far amid the brutal second wave could well be misplaced. Hence, caution is warranted. So much about this second wave – made worse by a crippled health infrastructure – is still unknown. It’d be naïve to expect it to play out exactly the way it did in 2020.
Global investors are already treading warily – for instance, BNP Paribas recently downgraded India from ‘overweight’ to ‘neutral’ in its Asian model portfolio. Many of them, who kept their faith in India and China last year, are no longer waiting to see how things pan out, and have begun selling in India and investing in Taiwan and South Korea instead. Domestic investors too need to slow their roll, lest the bubble they’re operating in bursts.