Nifty under Stress on Partial COVID Lockdown in MH and Negative Global Cues

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India’s benchmark stock index (NSEI) closed around 14675.70 Monday; tumbled almost -2.04%, biggest one-day slump since late Jan on partial COVID lockdown in MH/some other states and negative global cues. Dow Future slips on surging U.S./global bond yields (Taper Tantrum 2.0) amid the concern of higher inflation/reflation; i.e. higher borrowing costs, negative for non-financial equities.

Locally, the market is now concerned about the renewed surge in coronavirus cases in some Indian states by a mutant (‘India variant’), more infectious. There are partial lockdowns, night curfews, and some other COVID restrictions on social/political gatherings including in restaurants, cinema halls in various states like MH, GJ, MP, and KA, etc. These states contribute mostly to the Indian GDP output.

The market is also concerned about slow vaccinations (COVID) in India despite signs of partial herd immunity. Various government/private serological surveys are indicating 30-60% of Indians in various places (erstwhile COVID hotspots) may have been already infected and recovered; i.e. attained partial natural herd immunity. But for sustainable long-term herd immunity, a minimum of 80% COVID infection is required pan-India levels and that may be far away.

Also, many people are now not wearing masks in public places, thinking that the COVID may be a thing of the past amid lower infections. All these along with the almost full reopening of the country are now causing a sudden rise in fresh COVID cases. And although this is far from any 2nd COVID wave, authorities in various states are now not ready to allow any big surge (2nd wave) and thus taking various restrictive steps to slow the spread from the early stage with a warning of full lockdown, if the public does not maintain basic COVID mitigation protocols.

In any way, despite visible signs of natural herd immunity, India needs to vaccinate at least 80% of its population as early as possible to regain public confidence and full reopening of the economy. There may not be any alternative for mass-vaccinations (COVID), but at the present rate, it may take even 2024 for the completion of the same.

Although there is practically no probability of an all-out or more intense COVID lockdown 2.0, as Nifty is extremely overvalued at present levels, it needs some excuses for a healthy correction and it’s doing exactly that after a huge rally of almost +36% since Oct low (pre-U.S. election).

The market as-well-as Indian policymakers are also concerned about rising transportation fuel (petrol & diesel) prices, which is not only causing price instability but may also cause political instability in the coming days despite various green shoots narrative for the economy. The Indian FM, RBI governor are now calling for an urgent reduction in taxes (by both Federal & state governments) on petrol, diesel, and other oil products.

Also after the market hours Monday, RBI Feb minutes show the central bank is quite concerned about elevated core CPI and also ‘danger of irrational exuberance’ in equity markets. But RBI is also emphasizing to keep ultra-accommodative monetary policies in place at least till H1-2022 to ensure economic recovery as-well-as to keep effective borrowing costs as low as possible for the government (biggest & best borrower) to fund a deluge of COVID/other fiscal/infra stimulus.

On the weekend, there was unconfirmed news that the Indian government may further recalibrate GST rate structures between 12-18% into a single slab, say 15%. But on Monday the government denied any such intention in the forthcoming GST council meeting.

On Monday, the Indian market was dragged by almost all the sectors except metal (high prices since Sep’11 amid reflation optimism and lower supply from China). The Indian market was dragged by media, techs ( at a 1-year low and suspense over H1B visa issues), reality, PSU banks (lower GSEC/bond prices, negative for their MTM/EBITDA), pharma, automobiles, infra, energy, selected private banks and FMCG. Nifty was dragged by RIL (SC stay over FRL M&A/Amazon issues), HDFC (NS:), TCS (NS:), Infy, ICICI Bank (NS:), Axis Bank (NS:), ITC (NS:), L&T, and M&M. Nifty was helped by HDFC Bank (NS:), Adani (NS:) Ports, Hindalco, JSW Steel (NS:), Tata Steel (NS:), and Grasim (NS:).

On early Tuesday, Nifty surged almost +200 points amid positive global cues as global bond yields eased slightly on coordinated jawboning by both Yellen (U.S. Treasury Secretary) and Lagarde (ECB President) to stem the higher bond yields on both sides of the Atlantic. Lagarde said the ECB is closely monitoring the evolution of long-term nominal bond yields. Also, the progress of CARES Act 3.0 in the U.S. House supported the risk-on sentiment coupled with expected dovish talks from Fed Chair Powell later in the day. But Nifty soon slips almost -200 points from the session high (from 14853 to 14653) despite Dow Future was more or less stable; the Indian market is under some stress on the concern of renewed spikes in COVID and very slow vaccinations.
On early Tuesday, Nifty was also boosted by RIL as the company is further deleveraging by hiving off its refining & petrochemical (O2C) business into a separate 100% subsidiary, which may help the company’s focus to capture CO2 points/bottom line. Looking ahead, the separate O2C business of RIL may also help it find further strategic investor/monetization (deleveraging) such as Saudi Aramco (SE:). RIL will have four major businesses henceforth: Energy, materials, digital, and retail. RIL may also create a holding company (like Tata Sons) for the entire group of companies in the future.

Technical View: Nifty and Future

Technically, whatever may be the narrative, Nifty future now has to sustain over 14675-14645 levels for some rebound; otherwise, it may correct more. Similarly, Bank Nifty future also has to sustain over 35000 for some bounce back; otherwise, expect more correction as below:

NIFTY FUTURE

NIFTY FUTURE

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