At 47,362.71 points—the day’s low on April 19—the S&P BSE Sensex witnessed an absolute correction of over 5,154 points, or 9.8%, compared to 52,516.76 points—the latest life-high on the S&P BSE Sensex on February 16 this year.

Similarly, Monday saw the 50-stock Nifty 50 index of the National Stock Exchange (NSE) touching the day’s low of 14,191.4 points—an absolute correction of over 1,240 points, or 8%, compared to the February 16 life-high of 15,431.75 points. The sharp correction in the benchmark indices, all in a matter of 41 trading days, is testing the bull run which the Indian equities were promising in mid-February.

And, the prime reason for Monday’s sharp fall of over 1,469 and 426 points each in the Sensex and Nifty 50, was the second wave of the Covid-19 pandemic which has surged way too high. Compared to a daily average of 35,871 cases in March 2021, Saturday saw a jump of more than 7 times at 2.61 lakh cases.

In their April 19 report, Indranil Sen Gupta and Aastha Gudwani, both economists at the brokerage firm, BofA Securities India, wrote that they are concerned that rising Covid-19 cases could pose a risk to India’s still shallow recovery. The duo also argued that while 7.8% of the total population had received the first dose, only 1.2% have received both doses of the Covid-19 vaccine. “It remains to be seen if the cases subside with the state-level lockdowns that we are seeing,” the duo added.

In their base case scenario, Sen Gupta and Gudwani see India’s real gross domestic product (GDP) rebounding to 9% in FY22 from a contraction of 6.4% in FY21. “We estimate that a national lockdown—if finally needed—would pose a 300 basis points risk,” they warned. “It remains to be seen if this second wave of Covid-19 cases subsides without a serious national level lockdown.”

In the duo’s view, a month of nationwide lockdown costs around 100-200 basis points (1%-2%) of GDP. Given the high economic cost, Sen Gupta and Gudwani expect the central and state governments to try to contain the spread with the tightening of Covid-19 regulations, night curfews, and localised lockdowns, as 10 of the 29 states accounted for 78.6% of total daily cases. “After the Maharashtra government announced stringent restrictions akin to a lockdown, many other states have followed suit.”

And that was the reason why the benchmark equity indices saw sharp fall on Monday. According to Vinod Nair, head of research at the Kochi-headquartered Geojit Financial Services, the domestic markets nosedived primarily because of surging Covid-19 cases and the subsequent imposition of restrictions continued to fan investor worries. “Increasing restrictions are forcing investors to reconsider the current valuations,” Nair argues.

While the Sensex and Nifty 50 fell 3% and 2.9% each to Monday’s low, they recovered during the day trade. At the end of Monday’s trading, the Sensex closed lower by over 882 points, or 1.8%, at 47,949.42 points. While the Nifty 50 lost over 258 points, or 1.8%, to close at 14,359.45 points. “This made India the worst performing market in Asia,” says Mumbai-based Deepak Jasani, head of retail research at HDFC Securities.

In Jasani’s view, the Nifty 50 has formed a second down gap in five days signifying an underlying weakness. However, Monday’s close was near the intraday high, thereby, making a hanging man type of formation. “This could mean some more upside recovery in the near term,” Jasani says. “However at higher levels, markets will keep seeing repeated selling given the impact of Covid-19’s second wave on businesses and the economy.”

On a similar note, Ajit Mishra, vice president, research, at Religare Broking is of the view that the Indian markets seem to have decoupled from global counterparts due to rising Covid-19 cases. “Going forward, the Covid-19 situation and the pace of vaccination would be a key monitorable for the markets,” says Mishra. While the March ‘21 quarter’s earnings announcement from select Nifty 50 majors could induce stock-specific volatility, Mishra choses to maintain a cautious stance in the near term.

In the current scenario, the fall in daily Covid-19 cases seems to be the only factor which could provide stability to equity markets.

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