Indian markets dangerously resist virus resurgence

India's virus resurgence is alarming almost everyone except foreign investors. As hospitals in New Delhi run short on oxygen, funeral pyres burn across the capital and residents wonder which city will get overwhelmed next, local markets are ticking along in the expectation of attractive returns.

Fund managers have turned net sellers of local equities after six months of inflows. The benchmark Nifty 50 just had its best day in almost a month, however, and the MSCI India Index is up over the period too. The India basket trades at an exuberant multiple of nearly 21 times projected earnings for the year, a premium to the MSCI Emerging Markets Index. After depreciating earlier in the month, the rupee is rebounding too.

Multiple factors underpin the optimism despite more than 360,000 new cases in 24 hours on Wednesday. India's economy is slowing but less harshly than during last year's lockdown. There's confidence in a faster vaccine rollout, as well. Half the country could be inoculated by year-end. About 9% of the population has had one dose, per Reuters, a higher rate than in Japan and Australia. The rate is double in big cities like Mumbai.

The acceleration of digital adoption is also supporting longer-term perspectives. The crisis has forced people and businesses online, putting India in position to develop technologically faster than otherwise. A strong capital cushion provides extra comfort. Foreign-exchange reserves of almost $600 billion are roughly double the level in 2013, when the US Federal Reserve curtailed its quantitative easing programme and triggered rupee volatility. Prime Minister Narendra Modi's policy agenda from incentives for manufacturers to privatisation is also a draw.

The assumption is that emerging market returns will outpace those of developed ones where interest rates are low or negative. Another is that the rich sliver of the population, whose consumption matters most, won't be impacted much, allowing index heavyweights from Reliance Industries (RELI.NS) to HDFC Bank (HDBK.NS) to thrive even as smaller rivals struggle. But economists are starting to slash their growth forecasts for India, rising inflation may yet prove a spoilsport, and eventually the weakened spending power of the masses who receive little official support will bite. The tragedy discount looks too low.