The story so far: On Friday, even after the Reserve Bank of India announced a series of measures to stimulate the economy during a pandemic, stocks fell 1% to close at 29,416 points. The stock market has experienced great volatility, the Sensex benchmark having fallen by almost 40% compared to the peaks it had reached in January.
Where was Sensex in January?
On January 20, the Sensex hit an all-time high of 42,274 in one day, dropping 16,635 points to a 52-week low of 25,639 points in one day on March 24. This assumes significance 20% is generally considered to be a bearish phase in the markets. While the barometer of 30 stocks has recovered 4,177 points or 16% compared to the lows, it is still experiencing great volatility with an underlying weakness. By the way, the India VIX, which is taken as a measure of short-term market volatility, has jumped more than six times this year, dropping from 11.7 in December to current levels of 70.4. The intensity of the decline can be more measured by the fact that the current month has seen the indices reach their 10% lower circuit breaker twice while also recording some of the largest decreases of a day.
What is the reason for the huge dive?
The biggest reason for the volatility and the ongoing fall is the global coronavirus pandemic. In India, the number of coronavirus cases is less than 1,000 (as of March 28), while the country is in the middle of a 21-day blocking period as part of the government’s attempts to limit the spread. The pandemic has raised fears that global economic growth will be deeply affected. The International Monetary Fund (IMF) has already said that the world had entered a recession as severe or worse than in 2008 when the global financial crisis hit. Investor concerns in India have led foreign portfolio investors (REITs) to sell stocks worth nearly 60,000 crore in the current month, the highest monthly sales ever recorded by investors strangers.
Does the sale occur in all sectors?
A generalized sales frenzy has taken hold of the markets without any isolated sales sector. Banks and financial services, however, have paid the price, since investors believe that the economic impact of the pandemic will lead to an increase in bad debts of these entities. Industry heavyweights such as HDFC, ICICI Bank, Axis Bank, State Bank of India, IndusInd Bank and Bajaj Finance, all of which are part of Sensex, have dropped significantly, with some currently trading near their lowest level multi-year. Auto inventories were also among the hardest hit, with most factories closed due to the foreclosure. Some stocks of fast-moving pharmaceuticals and consumer goods (FMCG) were able to stem the decline to a limited extent, although they are currently well below their peaks.
Are steps being taken to address investor concerns?
Globally, governments and regulators are taking initiatives in the form of stimulus packages to support the economy. For example, the United States Senate and House have approved a $ 2 trillion coronavirus rescue program. Earlier, the US Federal Reserve announced a $ 700 billion stimulus package. In India, the Reserve Bank of India (RBI) sharply reduced the key rate by 75 basis points and made it possible to defer monthly assimilated payments (EMI) by three months. The repo rate was reduced by 75 bps while the reverse repo rate was reduced by 90 bps. In addition, the liquidity reserve ratio has also been reduced, which will generate 1.37 lak crore of liquidity. Cumulatively, the RBI measures will result in an infusion of 3.74 lakh crore into the banking system. The Securities and Exchange Board of India (SEBI), for its part, has relaxed many compliance requirements while tightening short selling standards and margins to keep the stock markets running smoothly.
The consensus estimate is pessimistic due to the absence of positive triggers. As policymakers around the world try to provide incentives, the uncertainty surrounding the pandemic has pushed investors back. They believe that the current crisis is not due to a tightening of liquidity, as was the case during the Lehman crisis, it is difficult to counter it by a simple infusion of liquidity. Most analysts expect the pandemic to affect corporate profits in the coming quarters. Leading global financier Morgan Stanley lowered its Sensex year-end target by just over 11% to 32,000 from 36,000, although she believes the current downside of the stock market is close to its lowest. Analysts are unanimous in believing that the pandemic will reach India’s growth rate and that, therefore, risky assets like stocks are going through liquidation from investors in all categories.
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