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Why isn’t India’s stock market falling more? The question is a fair one, considering the risky asset class in a country struggling with its most horrific calamity since its violent partition nearly 75 years ago. New daily covid infections have remained above 300,000 for two weeks now, the worst caseload the world has seen. The death rate is 3,700-plus— probably much higher if you discount the under-reported official statistics. Fear of the virus is pervasive. Even the rich and powerful are finding it hard to arrange a hospital bed or get an oxygen cylinder.

But in all this, the benchmark Nifty 50 Index is down ever so slightly, clocking a less than 5% decline since mid-February. At 32 times earnings, almost double the valuations in China, the Indian market is super-expensive. The logic for those prices runs like this: Unlike last year, there’s no national lockdown. And there may not be one if the wave’s peak is just a week or two away, as some epidemiological models suggest. Besides, investors know from the first wave in 2020 that firms will protect earnings by idling operations and firing workers if required. Those who keep their jobs may cut back on discretionary spending. Their excess savings will gravitate to listed stocks.

Another reason for optimism is the expected response of authorities. That’s based, again, on last year’s experience. If more infectious variants of the disease make a national lockdown inevitable, the finance ministry and central bank might come together to offer moratoriums, state-guaranteed loans and other liquidity-enhancing measures to make up for disappearing cash flows. Sure enough, the Reserve Bank of India on Wednesday announced repayment relief, as well as 50,000 crore in three-year funding at its policy rate of 4% for banks to extend to vaccine makers, hospitals and oxygen suppliers.

There is more elbow room for policy action than existed just a couple of months ago. Bond and foreign-exchange markets have given up opposing further fiscal-monetary easing. Traders who were pulling long-term yields on government securities higher—or pushing the rupee lower—have stepped aside. Like last year.

But all this ignores a basic reality: India’s 2021 is shaping up to be nothing like 2020. A year ago, early and harsh curbs spread misery among rural workers living in cities. But the healthcare system wasn’t overwhelmed. Worse, the virus has infiltrated villages. Areas that last year offered sanctuary and work to a returning migrant labour force might themselves need support. As for large firms protecting profitability, this thesis may not hold if raw material prices stay at their highest levels in a decade. Unlike this time last year, industrial metals, energy and agricultural products are all firming up.

There are other differences. In 2020, capital-supplying nations didn’t have vaccines, let alone inoculation drives, which are running much faster than in India, where only 2% of the population has got the required two doses so far. S&P Global Ratings says gross domestic product growth for the current fiscal year may be 9.8%, down from its March estimate of 11%, if infections peak in May. One more month of rising cases may slow the expansion to 8.2%, following an 8% drop in output last fiscal year. India’s fragile investment-grade rating is hanging in balance.

Even if it isn’t altogether derailed, India’s economic recovery this year will probably decouple from the US, where Treasury Secretary Janet Yellen is hinting at “somewhat" higher interest rates to prevent overheating from more government stimulus.

BNP Paribas recently downgraded India to ‘neutral’ from ‘overweight’ in its Asian model portfolio.Manishi Raychaudhuri, BNP’s head of Asia-Pacific equity research, has warned of “consensus downgrades to Indian earnings estimates, which anyway appear optimistic to us."

Caution is warranted. So much about the pandemic is unknown. The consortium of laboratories handling genome sequencing of the virus had cautioned in early March of “very prolific" new variants. The result of ignoring scientific advice and allowing everything from big weddings and large religious gatherings to packed election rallies may not have become fully evident yet. A model from the Institute for Health Metrics and Evaluation at the University of Washington forecasts over 1 million deaths by the end of July, almost double the fatalities in the US and more than four times India’s current official tally.

Global investors, who kept their faith in China and India last year, aren’t waiting for equity analysts to change their minds. They sold India in April and bought South Korea and Taiwan. That may be more prudent than pretending the second wave is just a bigger version of the first with predictable consequences. Based on what we have seen so far, that’s not the case.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services.

©bloomberg

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