View: Dalal Street is shockingly resilient amid Covid devastation

By Andy Mukherjee

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 and independence nearly 75 years ago. New daily Covid-19 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 underreported official statistics.


Fear of the virus is pervasive. Even the rich and the powerful are finding it hard to arrange a hospital bed or track down 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 peak of the surge is just a week or two away, as some epidemiological models indicate.

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 stocks even as pain accumulates in smaller firms that don’t trade on public markets.

Another reason for optimism is the expected response of authorities. That’s based, once again, on last year’s experience. If more infectious variants of the disease make a national lockdown inevitable, the finance ministry and the 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 Wednesday announced repayment relief, as well as 500 billion rupees ($6.8 billion) in three-year funding at its policy rate of 4% for banks to extend to vaccine makers, hospitals and oxygen suppliers.

There is no doubt 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. Just 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 physical distancing measures spread panic and misery among rural workers living in cities. But the health-care system wasn’t overwhelmed. Worse, the virus has now infiltrated villages. Areas that last year offered sanctuary and work to a returning migrant labor force might themselves need support. As for large firms managing to protect profitability, the 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 globally.

There are other differences. In 2020, capital-supplying rich nations didn’t have vaccines, let alone inoculation programs, which are running much faster than in India, where only 2% of the population has obtained 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 in the year that ended on March 31. India’s fragile investment-grade rating is hanging in balance.

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

BNP Paribas SA recently downgraded India to “neutral” from “overweight” in its Asian model portfolio. In an interview with Business Standard, Manishi Raychaudhuri, BNP’s head of Asia-Pacific equity research, warned of “consensus downgrades to Indian earnings estimates, which anyway appear optimistic to us.”

Caution is warranted. So much about the pandemic — and its interplay with an ill-prepared health system — 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 more than 1 million deaths by the end of July, almost double the fatalities in the U.S. 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 instead. 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 clearly not the case.