India’s risky asset class has been faring well, infact its super expensive stock market, at 32 times earnings, almost double the valuations in economic giant China, has shown odd resilience. The big question is, how are Indian financial markets continuing their upward march, despite Covid explosion, causing an apocalyptic crisis, which has ripped through the country, with the economy in tatters, and the government in a melt down. In the face of unfolding tragedy in India, India’s Dalal street is continuing its upward trend, with the BSE Sensex up more than 3% so far this year, while the Nifty 50 index has jumped about 7% over the same period. But why and how? Investors sentiments are primarily buoyed by central Banks’s iquidity announcements, corporate earnings, global cues, but largely investors are drawing comfort from the ‘rear view bias’ on expectations that a swift recovery may follow once the caseload peaks and begins to turn down, akin to the last year. Unlike 2020, Indian government has not imposed a nationwide lockdown, and as Epidemiological models suggest that the virus wave may peak in a couple of weeks, investors are displaying confidence. But in a worst case scenario, Investors are basing their optimism on a 2020 scenario, when firms protected their earnings, vegetating their operations and fired their workers. Investors are also showing signs of stability, again on a ‘rear view bias’ -that even if the virus continues to wreak havoc, delaying the expected peak timeline, making nationwide lockdown inevitable, the country’s central bank and Government will come to rescue, again! Offering liquidity enhancing measures to make up for vanishing money, state guaranteed loans and stimulus packages. Last year, India enacted a strict national lockdown to slow the spread of the coronavirus, but the shutdown hammered the economy, which contracted 23.9% last year between April and June.India’s finance minister in November 2020, announced a $35.14 billion package to stimulate the economy by boosting jobs, consumer demand, manufacturing, agriculture and exports. Moreover, India’s Reserve Bank also announced liquidity measures, including reducing reverse repo rate and TLTRO to relieve pressure on an economy ravaged by the COVID-19 crisis. Guaranteeing that the government and state Bank will respond to any such crisis in a similar way, the Indian government has already introduced fiscal stimulus in an effort to restart the economy. The Reserve Bank of India announced fresh support to mitigate the economic stress from the country’s second wave- offering payment relief and a $6.8 billion in three year funding at its policy rate of 4% for banks to extend hospitals, oxygen suppliers and vaccine makers, thus boosting the health sector. Moreover, the stocks at Dalal Street, despite being volatile and range-bound are also supported by hopes of recovery through vaccination, and positive global cues including US president Joe Biden’s decision to waive intellectual property rights on vaccines and easing restrictions on movement in the US & Europe. What is also driving the indian markets avoiding Covid hiccups, is the upcoming March quarter earnings, with Indian brokerages projecting around a 10 percent growth in key earnings parameters, according to the weekly reports by the brokerage firms. But, while India’s financial markets are still braving Covid, its further spread will dictate the severity of the restrictions, which in turn will impact the growth trajectory and direction of Dalal street, since the odds are turning to be different in 2021 unlike 2020. In 2020, India’s health sector wasn’t exhausted, and areas that offered sanctuary to laid off workers, are themselves struggling today. Moreover, the rising inflation is also key, this year, which may not allow liquidity easing, which would make it hard for large firms to manage their profitability. Adding more weightage to the argument, rising global oil prices, with Brent crude back at around $70 — and Indian imports eventually picking up as well as demand recovers, it’s going to exert an exorbitant pressure on the Indian rupee in the second half of the year, which may further escalate inflationary pressures, as Indian rupee is already hovering around 76.5 against US dollar. Thus, strengthening Inflation, will ultimately fuel debate over continuity of loose monetary policies by central banks and may detract investor sentients at Dalal Street. Moreover, global brokerages have already raised alarms over India’s Covid crisis, downgrading India’s economic growth projections. Japanese Based Nomura downgraded its projections of economic growth for the fiscal year ending March 2022 to 12.6 per cent from 13.5 percent earlier, US based JP Morgan now projects GDP growth at 11 per cent from 13 per cent earlier. UBS sees 10 per cent GDP growth, down from 11.5 per cent earlier and Citi has downgraded growth to 12 per cent, however, in its alternate risk scenario, where disruptions could last longer, UBS fears there is a risk India’s real GDP could slow by a much larger magnitude, to 3-5 per cent in FY22. Wall Street brokerage Bank of America (BofA) Securities has also warned that a spike in covid cases poses a risk to economic recovery in India, and the GDP is unlikely to achieve the earlier projected 3 per cent growth for March quarter 2020-21. Fearing that a month-long nationwide lockdown can shave off 100-200 basis points off the GDP. While the Indian markets may still be exhibiting cautious defiance, its battle against Covid 19 may prove to be futile, which will mark the darkest chapter in its history, as it’s hard to anticipate the magnanimity of any crash.