Stocks sink as Omicron strain scares investors

The BSE Sensex closed 949.32 points or 1.65% lower at 56,747.14 and the National Stock Exchange’s Nifty index fell 1.65% to 16,912.25. Markets in other Asia-Pacific regions were mostly down, with Hong Kong’s Hang Seng index falling 1.76%. In China, the Shanghai Composite fell 0.5%, Japan’s Nikkei 225 fell 0.36%, and South Korea’s Kospi index fell 0.17%.

“The ambiguity around Omicron ahead of the crucial policy review of the Reserve Bank of India on Wednesday continued to dampen the morale of domestic investors. The domestic market is expected to remain volatile as the near future will be dominated by the development of new forms and policy decisions of the Reserve Bank of India and the US Federal Reserve. Vinod Nair, Head of Research, Geojit Financial Services, said the market expects the RBI to stick to the accommodative policy in view of the short-term uncertainties.

The Omicron version of Covid-19 is spreading rapidly in India, with the number of people contracting the new version of the coronavirus rising to 21 as of Sunday, when the first case was reported just four days ago.

The concerns of investors have increased in the monetary policy review of RBI. However, economists expect the central bank’s monetary policy committee to keep interest rates on hold and delay policy normalization as the Omicron variant could pose risks to India’s economic recovery, according to a Mint poll of bankers and economists.

Reflecting panic among investors, India VIX, a volatility index, jumped nearly 9% on Monday to end at 20.08. A jump in the volatility index indicates a significant increase in the risk perception of the investors.

Meanwhile, Indian stock markets are also rapidly losing forex support. Foreign liquidity could be at risk as the US Federal Reserve prepares to reduce bond purchases faster than expected. Foreign institutional investors (FIIs) have been continuously dumping Indian stocks for the past few months amid heavy valuations and concerns over the spread of the Omicron variant.

India has lost $3.4 billion of FII money in equities since October, indicating that strong liquidity inflows into the markets may not continue. Besides, Omicron’s rising threat is also threatening the equity rally amid continued recovery in India’s domestic economy. FIIs sold Indian shares worth $2.27 billion in October, $756 million in November and $368 million in December.

According to Morgan Stanley, India and Indonesia are most at risk if US 10-year real rates rise sharply in the short term.

“We believe that policymakers in Asia will be able to gradually normalize policy, depending on the pace of recovery, inflation dynamics and the impact of the Omicron variant, rather than the Fed policy path. The risk is that if more When US 10-year real rates rise sharply in the short term, it will create volatility in financial conditions in Asia, although we believe the eventual impact will be more muted than in 2013. If this risk scenario were to be eliminated. We see India and Indonesia as more exposed economies,” it said in a note on December 5.