Investors fear fallout from state lockdowns on market to fight Covid

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Analysts have started cutting stock price targets for some of the biggest banks and auto giants.

Investors are bracing for market fallout as state after state locks itself in India to contain the spread of the coronavirus as infections and deaths rise.

More than two-thirds of states are closed if assessed by their contribution to domestic production, Jefferies analysts calculated last week. Tamil Nadu, home to foreign manufacturers including BMW and Dell, will also close from Monday, while Delhi extended its lockdown by a week. The moves come as pressure is on Prime Minister Narendra Modi to impose tough nationwide restrictions, as he did last year.

All this is forcing a reassessment of investors who hoped that less severe brakes would soften the blow to economic growth. Earlier in May, India’s central bank assured markets it expected the decline in aggregate demand to be moderate from a year ago, with “localized and targeted containment measures.”

News of strict lockdowns in several states could hurt sentiment ahead, wrote Ajit Mishra, vice president of research at Religare Broking Ltd., in a report. Investors will follow key macroeconomic data this week, including inflation and industrial production, as well as the vaccination campaign, he said.

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Vaccine shortages have complicated efforts to tame the outbreak, leaving investors to assess Modi’s next moves and guess how long states will need to stay shut. Amid the uncertainty, foreign investors withdrew $ 1.9 billion from India’s stocks and debt in April, the largest outflow in a year, according to data compiled by Bloomberg.

“Although India has so far refrained from a nationwide lockdown given its enormous economic costs, the scales are quickly tilting towards the humanitarian benefits of reduced mass transmission, as new infections continue to rise. ‘increase with no peak in sight,’ said Chang Wei Liang, an analyst. at DBS Bank. “Even without a lockdown, Indian city mobility data is already showing that fewer and fewer people are leaving their homes. This implies a natural drag on retail spending and business investment, until the viral transmission of mass ceases. “

Here is how the crisis is affecting the markets:

Sovereign bonds

Recent interventions by the Reserve Bank of India have limited yields on 10-year sovereign bonds. But, lockdowns could make it difficult to keep borrowing costs low for much longer.

Any shortfall in income would fuel fears of another hike in government borrowing, already nearing all-time highs, adding upward pressure on yields.

Earlier this month, the central bank announced the second tranche of its government securities acquisition program – India’s version of quantitative easing – under which it will buy Rs 35,000 crore ($ 4.8 billion ) sovereign bonds on May 20.

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The lockdowns risk increasing the prices of everything from essential drugs to cars, due to disruption in supply chains. Consumer price inflation was already on track to test the upper bound of the RBI’s 2% -6% target, and recent wholesale price gains signal increased pressure. If these tensions increase, the RBI may find it difficult to sell bonds to investors at current yields

Rupee

The relative progress in the fight against the pandemic has been an important factor in the global currency markets. India and South Africa present a case study on one of the five so-called fragile emerging markets: Turkey, Brazil, South Africa, India and Indonesia

The Indian rupee is down about 0.5% against the dollar this quarter even after a recent rebound, while the South African rand has gained 5.1%. Learn more about the outlook for the rupee

India faces the world’s worst outbreak, contributing half of the world’s new infections, while South Africa has seen new cases drop by around 90% from a recent peak in January. India reported 669 infections per 100,000 people over the past month, about 10 times that of South Africa, according to Bloomberg calculations based on data compiled by Johns Hopkins University.

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The rupee slipped in the rankings against its Asian peers after leading the field in the first quarter. Any national lockdown could deal another blow

Stocks

Jefferies predicts that the Indian economy will grow 10.2% in the year through March 2022, down 3 percentage points from its initial outlook. The figure should already be taken with a grain of salt given the contraction of the previous year. Any slowdown could weigh on corporate profits

Analysts have started cutting price targets for stocks of some of the biggest banks and auto giants

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The markets will correct if the government announces a nationwide lockdown, “said Naveen Kulkarni, chief investment officer at Axis Securities Ltd.” However, the critical factor will be the duration. The longer the lockout, the greater the correction. “

Corporate bonds

Goldman Sachs turned neutral on Indian credits last month, expecting limited margin for outperformance

Citing headwinds due to lockdowns, research firm CreditSights also changed its recommendation last month on local businesses, including Indian Oil Corp. and Reliance Industries Ltd., for underperforming.

DBS Bank warned that the market was turning complacent after Indian dollar bonds showed signs of recovering after a massive sell off in the first half of April.

Investors may be overly optimistic given the likelihood of a more lingering impact of the pandemic fallout on business and household finances, he said.

(Except for the title, this story was not edited by NDTV staff and is posted from a syndicated feed.)

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