Markets crash over 2% on covid worries; rise in bond yields sparks fear

Mumbai: Markets fell more than 2% on Monday amid fresh concerns over rising number of covid cases leading to fears of a deeper impact on the economy. Adding to those uncertainties is the fear of rising global inflationary risks as crude prices have been on the surge. The sell-off in equities worldwide is also following a sudden rise in 10-year bond yields across the globe.

Falling around 5% from their record highs, benchmark indices have seen the biggest single day decline in two months. The BSE Sensex slipped 1145.44 points or 2.25% to close at 49,744.32. The Nifty lost 306.05 points or 2.04% before ending at 14,675.70.

Maharashtra Chief Minister Uddhav Thackeray on Sunday warned that lockdown would have to be reimposed if daily covid cases continue to rise in the next two weeks, calling the situation in the state ‘serious’. After a lull of three months, Maharashtra has been seeing a steady rise of covid cases in the last few days.

“Rising economic restrictions from spike in virus cases and weak global cues hit the 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 was leading the rally slowed down due to global vulnerabilities from rising bond yield and inflation,” Vinod Nair, Head of Research, Geojit Financial Services said.

The India Volatility Index or VIX jumped the most in two months, ending 14.5% higher at 25.47 on Monday. Rise in the VIX indicates that the investors are increasingly anxious and worried which may lead to further corrections in stock markets.

According to Sonal Varma and Aurodeep Nandi, economists, Nomura the recent resurgence in covid-19 cases through more virulent strains, especially in Maharashtra, represents a near- term risk to growth normalisation in coming weeks. “However, the covid-19 resurgence remains relatively localised 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.

Meanwhile, the Indian rupee strengthened on Monday to close at a one year high against the US dollar tracking domestic equities. The domestic currency closed at 72.50 against the US dollar, up 0.21% from its previous close of 72.65.

India’s bond yields have been rising, in tandem with the global trends, and are feared to be hurting the hot equity markets which have rallied over 100% since the lows in March last year. The yield on the 10-year India GSec rose to 6.20% on Monday.

“We believe one of the recent surge in yield might be short selling by market players,” Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India said.

Ghosh said that while the significant increase in bond spreads is a manifestation of the nervousness of market players, the central bank will have to resort to unconventional tools to control the surge in bond market 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 rise exceptional year in FY21 bond markets with the Reserve Bank of India assiduously supporting debt management of government at lowest possible cost in 16 years, that otherwise could have threatened financial stability,” he added.

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