How has Covid-19 Affected the Indian Stock Market?

1. Effect of the Lockdown Due to Covid-19

As an immediate effect of the lockdown, economists cut GDP prices for the expected future. It was also predicted, that the country would bounce back quickly because of the nature of its industries. Losses from organized sectors in late March amounted to an estimated nine trillion rupees, which was expected to rise as the lockdown continued.

Depending on the market, segments like consumer retail projected to see sharp falls ranging from 3 to 23 percent. This meant running at less than maximum capacity to hold afloat for the major players throughout segments. But it depended on how long they could wait out the storm for the small businesses. Overall, pandemic dramatically changed modern habits.

The 2020 estimate of global GDP growth has been halved from 2.5 percent to 1.3 percent. The International Energy Agency (IEA) has forecast the first decrease in global oil demand in a decade alongside other country-specific forecasts with the virus impacting manufacturing and travel sectors.

2. The Effect on Global Markets

Economists expect the growth rate in China to slowdown up to 4 percent in the first quarter of 2020 from 6 percent in the previous quarter. The Eurozone economy is projected to contract by 0.1 percent in 2020, down from the 1 percent growth previously predicted. Fear about the effect of the pandemic on the global economy has harmed the optimism of investors and driven down equity prices in major markets. In the US, the 10-year Treasury yield plummeted for the first time in 150 years from 1.69 percent to below 1 percent, after staying steadily at about 1.7 percent across 2019 and early 2020.

Pre COVID19, market capitalization in India was about $2.16 trillion on each major exchange. Although the 2019 rally was limited to large-cap stocks like HDFC Bank, HDFC, TCS, Infosys, Reliance, Hindustan Unilever and ICICI Bank, etc. The market had witnessed a great start at the beginning of the calendar year both NSE and BSE traded at their highest levels ever, hitting peaks of 12,400 and 42,273 respectively. Apart from this, around 30 are expected to file for IPO’s later in the year.

3. Corona and Stock Market Volatility

India's stock market is experiencing a major increase in its volatility, as shown by the VIX index rising by about three times its usual pace, with markets halted twice in March 2020 due to lower circuit filter

During the countrywide lockdown, the regular average number of trades and the number of shares exchanged in the equity cash market segment increased significantly. NSE derivative market volume data shows a massive fall (20 percent) in the average number of daily derivative contracts traded in March 2020 compared to the previous months.

On 20 March 2020, SEBI took measures to monitor volatility and curb speculation by reducing position limits to almost half of what was previously permitted in certain stock futures, limiting short-selling of index derivatives, increasing the margin on those shares.

The COVID-19 had pushed the Indian benchmark index to a level that was witnessed during the Global Financial Crisis of 2008. The index had plunged more than 30 percent from their recent high in January. Some industries such as hospitality, tourism, and entertainment have been adversely affected and stocks of these companies have fallen by over 40%. The already slow economic growth, less job creation, high debt burdens, and credit crunch among NBFC and others have highly contributed, in addition to that the outbreak of coronavirus and extension of lockdown have highly impacted the economy of India.

RBI and the Government of India have come up with a series of reforms in response to the current chaos, such as repo rate reductions, regulatory relaxation by extending moratorium, and other steps to improve liquidity in the market. Deferred payments, stagnant loan growth, growing cases of bad loans, and weak market conditions have hindered economic activity growth and health.

4. Boosting the Liquidity in the System

The RBI has announced the second tranche of liquidity measures to boost the liquidity into the system. In the case of liquidity measure, the RBI has majorly focused on two instruments. As of April 15, the banks are having a surplus of Rs. 6.9 Lakh Crs under the reverse repo window and RBI has decided to inject this amount into the public by reducing the reverse repo rate 25 basis points or 0.25 % which come down to 3.75 percent from 4 percent earlier and maintaining the repo rate at 4.4 percent

It has announced 50,000 Cr worth of Targeted long term repo operations (TLTRO) which will be mainly focused on the worst-hit NBFC sector. In addition to that, the RBI has also reduced the requirement of Liquidity Coverage Ratio (LCR) of scheduled commercial banks to 80 percent from 100 percent which helps the financial institutions to lend more. And this will be restored in two phases one in October 2020 by 90 percent and 100 percent by April 2021. The RBI stated that a special refinance facility worth of Rs 50,000 Crs will be provided to the financial intuitions like NABARD, SIDBI, and NHB to boost the liquidity in those sectors

As for the Market outlook, we can only look back at their past. The Indian benchmark index drops are temporary, and each dip provides an opportunity for investors to enter the market and earn higher returns particularly for those with a long-term horizon. Besides, the higher the volatility, the greater the chances of having better returns.

Although these crises are real and have an effect on the global economy, historically such crises have not lasted long as the world is capable of finding answers to these challenges. Given the fact that the scale and effect of Coronavirus on the economy are tough to predict, the markets will likely bounce back soon after the crisis is over. With an average annual return (CAGR) of about 15 percent, rising from 100 points in 1979 to over 41,000 points in 2019, Sensex results showed again that corrections are temporary, but growth remains constant.