India’s $2.8tr stock market braces for ‘correction’

Issac John /Dubai Filed on May 11, 2021
Share markets are expected to see a ‘sharp correction’ soon, as profit booking continues in the coming weeks. — Reuters

India’s shares might witness more correction on account of rising bond yields and the second wave of Covid-19.

The debilitating impact of the second wave of Covid-19 outbreak on India’s economy will have its inevitable ramifications on the stock markets, triggering an imminent correction as foreign portfolio investors continue to exit the scene in droves, economists and analysts said.

On Tuesday, under sustained selling pressure, benchmark indices ended nearly 1.0 per cent lower, tracking weakness in global markets and dragged primarily by finance and banking stocks.

Analysts feel despite the market delivering positive returns in all four quarters of FY21 and going forward, India’s shares might witness more correction on account of rising bond yields and the second wave of Covid-19. “In the immediate future Indian markets could go in for some correction and consolidation phase but as time goes by it could recoup and standout,” said Rusmik Oza, executive vice president and head of Fundamental Research at Kotak Securities.

Nippon India Mutual Fund, one of the top performing fund managers, noted that investors in India’s $2.8 trillion equity market are underestimating the economic impact from the world’s worst coronavirus outbreak, which will delay any recovery and could trigger a “correction. “

Samir Rachh, who oversees $1.8 billion of assets at Nippon India Mutual Fund in Mumbai, said the market is completely ignoring the present situation, noting recent gains have been “driven by a huge amount of liquidity."

While the country is rolling out vaccines, the virus has spread to places that “do not have adequate facilities or the medical infrastructure to handle it," Rachh said. “If we don’t see it peaking, as estimated, and given how the stocks have gained from last year, there could be a market correction," Rachh was quoted as saying by Bloomberg.

Equity research analysts at Credit Suisse said in a note that share markets are expected to see a ‘sharp correction’ soon, as profit booking continues in the coming weeks. “We believe the equity market could see some further profit booking in coming weeks, but we expect this correction to be very sharp and to not last long,” said Credit Suisse’s Jitendra Gohil and Premal Kamdar.

The Sensex has surged 91 per cent from its March 2020 low, boosted by foreign inflows of $23.3 billion last year and optimism that stimulus measures will help engineer a strong economic revival.

However, FPIs pulled out net investments worth Rs59.36 billion from equities in the first week of May as lockdowns and travel restrictions across states hampered the prospects of a recovery that was widely expected in the medium term, analysts said.

In fiscal 2020-21, FPIs, which have been the main driver of domestic equities, have pumped in a record $37 billion or Rs 2.75 trillion into the equities, the highest in two decades, according to the data from the National Securities Depository.

As India’s tally of daily virus infections and related deaths hit records, benchmark S&P BSE Sensex climbed for two straight weeks while domestic institutional investors, including mutual funds and insurers, poured a net $1.5 billion into stocks in April, helping offset a similar outflow from foreign funds. That trend has continued so far in May.

The consensus growth projections for India currently stand at present between 10.5 per cent and 12.5 per cent for 2021-22. However, the spike in cases and ensuing lockdowns may impact projections. “Even if we assume a cut of about 100–150 bp to India’s GDP, India can still deliver low double-digit real-GDP growth in FY 2022, the fastest growth in the world,” Credit Suisse analysts said.

Analysts at CapitalVia Global Research said investor sentiments were hurt with surging Covid cases and the possible disruption being caused by the second wave hammered indices to lower levels.

Experts feel there could be considerable impact of the new pandemic surge on the economic and earnings growth at least in the first quarter of FY22. This would ultimately hit the full-year growth to some extent, but there could be faster recovery, post the second wave. —


Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.

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