States imposing strict lockdown set to hurt investors and economy

In an effort to stem the spread of COVID-19 pandemic, strict lockdown in several states will definitely hurt investor sentiment and India’s economy as a whole. Analysts at Jefferies calculated last week that more than two thirds of states are shut if assessed by their contribution to national output.

Jefferies forecasts India’s economy will grow 10.2% in the year through March 2022, down three percentage points from its initial outlook. The figure, as per Bloomberg, must be taken with a grain of salt given the contraction in the year-ago period. Any slowdown could weigh on corporate earnings.

Ajit Mishra, vice president for research at Religare Broking Ltd, wrote in a report that the news of strict lockdowns in several states may hurt sentiment ahead. He said investors will be watching key macroeconomic data including inflation and factory output this week and the coronavirus vaccine drive.

However, vaccine shortages have complicated efforts to stem the outbreak, leaving investors assessing Prime Minister Narendra Modi’s next moves, and guessing how long states will have to remain shut. As per data compiled by Bloomberg, foreign investors pulled $1.9 billion from India’s stocks and debt in April, the biggest outflow in a year. India is facing the world’s worst outbreak, contributing to half of the fresh infections in the world, while South Africa has seen new cases fall about 90% from a recent peak in January.

Chang Wei Liang, an analyst at DBS Bank, highlighted that while India has refrained from a national lockdown thus far given its huge economic costs, the scales are tipping fast towards humanitarian benefits of curbing mass transmission, as new infections continue to rise with no peak in sight. “Even without a lockdown, mobility data for Indian cities are already showing that less and less people are moving out of their homes. This implies a natural brake to retail spending and business investment, until mass viral transmission ceases.”

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DBS Bank warned that the market is getting complacent after India’s dollar bonds showed some signs of recovery after a sell-off in the first half of April. It said investors may be too optimistic given the likelihood of a more persistent impact from the pandemic fallout on the finances of companies and households.