COVID-19-related Uncertainty, Investor Sentiment, and Stock Returns in India

The COVID-19 period stands out due to the extremely high frequency of large daily stock market movements, making the financial market highly volatile and unpredictable. Albulescu (2021) and Zhang et al (2020) contend that varying perceptions of investors regarding the information available at one point of time and the resultant mixed reaction escalated the global financial risk drastically since the onset of the pandemic. Eichenbaum et al (2020) and Elgin et al (2020) find that stringent public health measures adopted by countries, which brought the economic activities to a standstill by restricting mobility, supply chains, and commercial activities, paved the way for the free fall of the markets. Stock markets across the world rose like a proverbial phoenix soon after the free fall, owing to the “whatever it takes” attitude of the major governments in cushioning the economy by way of unleashing monetary and fiscal packages of enormous magnitude.

India responded to the COVID-19 pandemic with a strict nationwide lockdown. The lockdown was devastating and the gross domestic product (GDP) growth for the first quarter of 2021–22 was -23.9% year on year (Paliwal 2020). However, Ali et al (2020) find evidence of positive average returns during the lockdown period and confirm that the lockdown had a positive impact on the performance of the Indian stock market. Healthcare, technology, and cement were the top performers throughout, while tourism, entertainment, and hospitality stocks fell by 40%. A V-shaped recovery was largely anticipated as financial authorities boosted the investor sentiment by administering reduced taxes, providing production-linked incentives, supporting micro, small, and medium enterprises (MSMEs), and upholding labour and farm sector reforms. Easy money propelled by high liquidity and low interest rates shot up the risk appetite, thereby inducing investment in the stock market. Indian companies also responded swiftly by cutting down costs, thereby protecting profits and strategically used the buoyancy in the market to raise capital for future growth. The stock market acted as a link between the current state and the future expectations of a strong economy in the post-crisis phase. Further, as soon as the second wave of COVID-19 took shape around mid-March 2021, the market topped out and corrected itself around 8%–9%. Thereafter, the market continued the rally led by the positive investor sentiment based on a brighter, long-term recovery boosted by the prospects of the mass vaccination drive.