Second Wave: The Market Response

Market Update -  28 April 2021

The Indian Equity market turned volatile last week as a spike in the second wave of cases, created record highs every day. This has led to a series of outcomes to be managed both on the health as well as on an economic scale.

India’s economic growth is expected to be higher than other countries globally and should remain so even after the cut in growth projections considering the impact of the second wave. The overall expectation is that the immediate quarter (April-June ’21) GDP will face a major hit. The pace of recovery will also depend on the duration of the wave and the proportion of the population that gets vaccinated over the next few quarters.

India — the only country among large economies, projected to grow at a double-digit rate in FY22

Market Impact last week (19 Apr — 23 Apr) 

Nifty was down 1.65% — its third straight weekly loss.


India VIX (a market volatility measure) had surged over 11%, indicating nervousness among investors. With the fear gauge creeping up, foreign investors were quick to pull out from emerging economies such as India.

Foreign Equity Flows:

Overseas portfolio investors have turned net sellers this month after strong inflows into India since October. FIIs have pulled out approximately 10,000 cr this month. However, this still seems small, representing only 6% of the 1,80,000 cr inflows in the last six months. 

India saw substantial inflows towards the end of last year, with a record high of 65,000cr equity inflow in November. In contrast, apart from March of 2020 which saw massive FII outflows, the month of September also saw outflows as — ‘risk and uncertainty prevailed ahead of the US presidential elections.

FII flows, this month saw an outflow similar to Sep’20 amidst uncertainty

Markets climb up this week (26 April onwards)

Nifty is up about 4% from last week’s lows so far.

After a three week downslide, Indian Equity markets renewed an upward climb in response to the below developments:

Localised Lockdowns:

Given the economic costs, stringent and long lockdowns like last year’s was definitely not the best solution to tackle the second wave. The trend this time around is that of short, localized lockdowns lasting a week or a fortnight. Since lockdowns are aimed at just a few cities, the economic impact is expected to be of a smaller fraction.

Vaccine availability improving:

The government has relaxed rules regarding vaccines. Vaccines that have been approved by regulators in the US, the UK, European Union and Japan will be given fast-track approvals in India. Indian manufacturers — Serum Institute, Bharat Biotech are ramping up vaccine production along with imports.

India so far has given more than 135 million doses of Covishield and Covaxin.

Russia’s Sputnik-V too would be rolled out in May by Dr. Reddy’s Laboratories.

Market expectation of Covid trajectory in India:

Similar to the duration of the second wave of Covid-19 cases in the west, the rise in India is expected to peak by end of May or early June. India’s Covid-19 trajectory has approximately been two months behind the US. Furthermore, the US recovering sharply does add to expectations of a similar scenario in India.

Positive global recovery:

Economies around the world, especially the US, Europe and China are reporting faster-than-expected levels of recovery. 

“As India battles the ferocious rise of new infections, a strong policy response is building” — Reserve Bank of India.

Does this mean that equities will continue moving upwards? 

It seems unlikely. The human cost of the pandemic is still severe and poses a risk until we see a clear reversal in cases. While the lockdowns are not at a national level, they might still hurt recovery while markets will continue to watch government action along with progress on the vaccination drive to curb the pandemic.