Markets plunge as rise in Covid cases sparks fear

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.

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.

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.

Several countries are seeing a resurgence in cases, with the US seeing the third wave of covid-19 and Europe a second wave.