Equities

Markets in a tailspin as Omicron rattles investor nerves

Indian stock markets made a drastic fall on Monday as investors turned jittery due to increase in the number of Omicron variant of covid cases in India. Weakness in Asian peers also added to overall nervousness.

The BSE Sensex slipped 949.32 or 1.65% at 56,747.14 and the Nifty declined 284.45 points or 1.65% at 16,912.25.

Markets in other Asia-Pacific regions were mostly under pressure.  Hong Kong’s Hang Seng index slipped 1.76%. The Shanghai composite in China was down 0.5%, Japan’s Nikkei 225 fell 0.36% while South Korea’s Kospi was up 0.17%.

 “Ambiguity surrounding Omicron continued to dent the morale of domestic investors ahead of the important Reserve Bank of India policy review on Wednesday. The domestic market is expected to be volatile as the near-term will be dominated by developments on new variant and, RBI and US Federal Reserve policy decisions. Market expects RBI to hold-on to the accommodative policy considering short-term uncertainties. However, a change is expected during H1 2022, which Indian market is factoring while global equities are trading mixed,” Vinod Nair, head of research, Geojit Financial Services said.

The Omicron variant of covid 19 has been spreading rapidly in India. In the last one week, the number of people who contracted the new variant of the coronavirus rose to 21, till Sunday.

Adding to investor cautious approach is the Rbi policy review which is widely expected to keep interest rates on hold and delay policy normalization, as the Omicron variant of the novel coronavirus poses risks to India’s economic recovery, according to a Mint poll of bankers and economists.

Anxiety and nervousness among investors have escalated as India volatility or India VIX jumped nearly 9% to end at 20.08 on Monday. Heated up VIX indicates investors are widely expecting the markets to see some further correction.

Meanwhile, Indian equities are also fast losing foreign money support. Foreign liquidity to Indian shares is feared to be under threat as the US Federal Reserve is gearing up to taper bond purchases faster than anticipated. Foreign institutional investors (FIIs) have been consistently dumping Indian shares for last few months amid concerns of steep valuations and spread of Omicron variant of covid.

India has lost $3.4 billion FII money in equities since October, an indication that markets may not continue to see robust liquidity flow. Looming threat of Omicron is also threatening equities rally amid a sustained recovery of India’s domestic economy. In October, FIIs sold Indian equities worth $2.27 billion, sold $756 million and $368 million in November and December.

According to Morgan Stanley India and Indonesia are at risk if and when US 10-year real rates rise sharply in a short span which would create volatility in Asia’s financial conditions.

 “We believe that policy makers in Asia will be able to normalise policy gradually, contingent on the pace of recovery, inflation dynamics, and the implications of the Omicron variant, rather than on the Fed policy path. The risk is that if and when US 10-year real rates rise sharply in a short span, this would create volatility in Asia’s financial conditions, though we believe that the eventual impact would be more muted than in 2013. If this risk scenario pans out, we see India and Indonesia as the more exposed economies,” it said in a note on 5 December.

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