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Fears of a second wave of covid-19 infections and a likely surge in inflation from higher crude prices dragged Indian stocks by the most in two months on Monday, in tandem with falling equities and rising bond yields worldwide.

The BSE Sensex fell 1,145.44 points or 2.25% to close at 49,744.32, while the broader Nifty index lost 306.05 points or 2.04% to close at 14,675.70. Indian indices are now 5% below their record highs set after the Union budget on 1 February. The India Volatility Index, or VIX, rose 14.5% on Monday to touch 25.47, reflecting investor anxiety about further corrections.

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On Sunday alone, India recorded 14,199 new cases of covid-19, continuing a recent trend of rising infections after several months of decline. The active caseload stood at 150,055 on Monday, with a cumulative national positivity rate of 5.2%. India has now reported over 11 million infections and 156,500 deaths.

“Rising economic restrictions from the spike in virus cases and weak global cues hit domestic market sentiment. The rate of market fall was aggravated by a sharp rise in volatility, being a monthly futures and options (F&O) expiry week. Foreign institutional investors (FIIs) inflows, which were leading the rally, slowed due to global vulnerabilities from rising bond yield and inflation," said Vinod Nair, head of research, Geojit Financial Services.

Terming the situation serious, Maharashtra has reimposed some curbs and warned of a lockdown if cases continue to rise. After three months of decline, cases are rising again in the state, which shoulders India’s heaviest covid-19 burden.

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According to Sonal Varma and Aurodeep Nandi, economists at broking firm Nomura, the resurgence through more virulent strains, especially in Maharashtra, represents a near-term risk to growth normalization. “However, the covid-19 resurgence remains relatively localized and second waves in other countries have proven less economically disruptive. Notwithstanding the near-term downside risks, we maintain our medium-term optimism underpinned by fiscal activism, easy financial conditions, base effects and faster global growth," they said in a report on 22 February.

Brent crude traded above $63 a barrel on Monday and is up around 22% this year.

The Indian rupee closed at a one-year high of 72.50 against the dollar, up 0.21% from its previous close of 72.65, while the yield on the benchmark 10-year government bonds rose to 6.2%. “We believe one reason for the recent surge in yield might be short-selling," said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India. Ghosh said that while the increase in bond spreads reflects the nervousness of market players, the central bank will have to resort to unconventional tools to control the surge in yields.

“This is important as any further upward movement in G-Sec yields, even by 10 basis points from the current level, could usher in mark-to-market losses for banks that could be a minor blip of a rather exceptional year in FY21 bond markets with the Reserve Bank of India assiduously supporting debt management of government at the lowest possible cost in 16 years, that otherwise could have threatened financial stability," he added.

Union health ministry data shows that over 86.3% of the new cases are from five states. Maharashtra continues to top new cases with 6,971 reported on Monday, followed by Kerala (4,070) and Tamil Nadu (452). Eighty-three deaths were reported in the last 24 hours; Maharashtra saw the maximum deaths (35), followed by Kerala (15).

The health ministry said that over 75% of the Indian population remains vulnerable to the infection, and there has been a spike in the number of daily cases in Chhattisgarh, Madhya Pradesh, Punjab and Jammu and Kashmir. Weekly cases in Maharashtra have grown from 18,200 to 21,300 in just four weeks, while the covid positivity rate jumped from 4.7% to 8%. In Punjab, the positivity rate has increased from 1.4% to 1.6% in the past four weeks, while the weekly cases in the last four weeks have grown from 1,300 to 1,682.

A study published in the Journal of Epidemiology and Global Health titled Exploratory Analysis of Demographic Factors and the Temporal Evolution of covid-19 in India suggested that highly urbanized states, including Maharashtra, Gujarat and Tamil Nadu, are vulnerable during the current pandemic, with incoming data from India further showing that hyper-urbanized cities like Mumbai and Delhi are hit the hardest, requiring additional health infrastructure sustainability amid challenges in the social environment.

“Different variants of the virus are floating around in various parts of the world. In India, we have had a crore of lab-confirmed cases; so, a lot of viruses are in circulation. The larger the number of viruses, the more are the chances of new variants emerging. Moreover, immunity after exposure is of doubtful strength and duration. We still have a large population uninfected by the virus," said Lalit Kant, a scientist and former head of epidemiology and communicable diseases at the Indian Council of Medical Research (ICMR).

Union health secretary Rajesh Bhushan last week said states with high case numbers are not doing enough RT-PCR tests, and there has been laxity in adopting preventive behaviour.

Several countries are seeing a resurgence in cases, with the US seeing the third wave of covid-19 and Europe a second wave. “The return to normalcy in daily life with the opening up of trains packed to capacity, covid-19 inappropriate behaviour, large-scale social gatherings and weddings without masks, can all lead to a second wave, which as experience from around the world shows, is always much worse and more devastating than the first wave," said Harsh Mahajan, senior vice-president, NATHEALTH and founder and chief radiologist at Mahajan Imaging in New Delhi.

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