Indian stock market's reaction to Covid-19 crisis is surprisingly muted

Expectations that Asia’s third-largest economy won’t take as big of a hit as last year
India’s Covid-19 crisis has so far failed to spark a deep stock selloff like that seen last year, and some asset managers point to less stringent curbs on activity as one factor at least for now.

Even as the nation reports more than 300,000 confirmed infections and over 4,000 deaths a day, India’s benchmark equity index has been moving in line with regional peers. The S&P BSE Sensex index has declined 6.6% from a mid-February peak, about as much as the MSCI AC Asia Pacific index. That compares with a 23% tumble in the Sensex in March last year when the coronavirus pandemic started to rage globally.

The surprisingly muted stock market reaction to India’s virus disaster can also be seen in net outflows of foreign investors, which totaled about $1.5 billion in April versus $8.4 billion during the height of the rout last March. They turned net buyers of Indian equities this week after four straight weeks of outflows. More limited and regional lockdown measures being implemented by state governments have prevented a slide in economic activity like last year, but the risk is that the outbreak may prompt a sharp escalation in restrictions again.

“A national lockdown is not priced into the markets,” said Arvind Chari, chief investment officer at Quantum Advisors Pvt. in Mumbai. A steep fall in stocks though would provide an opportunity to allocate more to that asset class, as equity valuations have grown expensive over the course of the last year, he said.

Companies are better equipped to continue operating as they know the procedures to operate in a lockdown, have cut costs, streamlined operations, and in many cases have raised capital, Chari said.

“The current approach India is taking to curb the virus -- staggered, state-level restrictions on non-essential services rather than a blanket nationwide lockdown -- suggests the impact is likely to be limited relative to last year,” said Abhishek Gupta, Bloomberg’s India Economist, in a note.

Expectations that Asia’s third-largest economy won’t take as big of a hit as last year have also been reflected in the rupee, which has recouped most of last month’s decline. Benchmark government bond yields have eased about 11 basis points in the last month after the Reserve Bank of India announced its version of quantitative easing in April.

Indian shares are moving more in line with global peers, which despite this week’s stumble have been on a bullish trajectory overall. The average monthly correlation between returns on India’s Nifty 50 and the S&P 500 rose to about 85% in the last year, compared with a 70% correlation over the longer term, according to Gaurav Patankar, an analyst at Bloomberg Intelligence.

“The market is currently supported by global sentiments and liquidity,” said Manish Kumar, chief investment officer at ICICI Prudential Life Insurance Co. “While India is seeing a surge in Covid-19, most developed nations are seeing a decline and that is what is supporting Indian markets.

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