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The second wave of coronavirus infections has hit India harder, with new cases rising every day. To curb the resurgence, state governments have imposed stricter restrictions. These curbs, though milder than last year so far, have begun to limit mobility and affect business activity. The impact would be reflected in India’s gross domestic product (GDP) growth in the coming quarters, and analysts have begun pruning expectations.

Still, this pessimism hasn’t caught up with the equity market so far. From its all-time high of 15,431.75 seen in February, the Nifty50 index is down by about 7%. Fear gauge Nifty volatility index (VIX) is currently at 23, much lower than the intra-day high of 86 levels it touched in March last year. Compare this with the massive drop in indices last year.

What is keeping the market afloat? Analysts point to a confluence of factors behind this complacency, despite the grim on-the-ground situation.

Market participants are taking succour from the performance of their global peers. Global equity markets, especially in the US, have been in good shape, courtesy of improving economic data. The S&P500 and Dow Jones Industrial Average index hit an all-time high of 4,195 and 34,200, respectively, earlier in this month.

“Global equity markets are doing well, and that does have a positive rub-off on Indian equities. So, we haven’t seen a sharp correction in Indian equities despite having one of the highest infection rates in the world," said Sanjay Mookim, head of research, JP Morgan.

Besides this, the benefit of hindsight seems to remind investors that if indices go down, they also go up. “We don’t think fund managers will make the same mistake of selling now, as they did in March last year. We have seen that the market has bounced back from those levels, so aggressive selling is unlikely this time," Mookim said.

Naveen Kulkarni, chief investment officer at Axis Securities Ltd, agrees. “Prior experience shows how the market made a massive comeback after bottoming out in March last year. So we don’t expect investors to offload equities in a big manner this time because, largely, the expectation is that with vaccination picking up pace, this curve will flatten," he said.

In March 2020, when a nationwide lockdown was announced, the Nifty50 corrected by 13% in one day. Consequently, the VIX surged 20% in one trading session.

But one year down the lane, shares have seen a sharp bounce-back. A recent Mint analysis of stocks in the Nifty500 index showed that more than 400 stocks have risen more than 50% from their March 2020 lows, and 247 stocks have rallied more than 100%.

Besides the feel-good factor from global markets, investors are hoping that India’s central bank would keep its accommodative stance longer, given the risks from the second wave. The minutes of the Reserve Bank of India’s (RBI’s) April policy show that members of the monetary policy committee are very worried about growth. “We feel RBI will be as accommodative as possible for the foreseeable future. The market is pricing in a laxed monetary policy stance for now, which is preventing a steep fall. At the most, we could see a 10% correction from the top, unless there is complete lockdown, and we don’t think India can afford a complete lockdown," said Amit Shah, head of India equity research, BNP Paribas.

Be that as it may, there is no better stimulus for the equity market than a faster pace of vaccination. The latest official data shows that India’s vaccination count currently stands at 127 million.

The government has allowed everyone above the age of 18 years starting 1 May. Analysts say this is sentimentally positive and increases hopes of normalcy resuming. However, supply constraints would make speeding up the vaccination process a herculean task. Mookim said that the second wave could peak in the first week of May. But to flatten the infection, the inoculation process must speed up.

Foreign institutional investors are already getting antsy and have sold equities worth $934 million so far this month. On a year-to-date basis, though, they remain net buyers to the tune of $6.39 billion.

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