Snakes lack an outer ear and a tympanic membrane. They retain an inner ear connected to the jaw bones, which makes them sensitive to ground-borne vibration and to a narrow band of low-frequency airborne sound, but the shrill notes of a pungi fall largely outside what they detect usefully.
What a cobra does in a basket is defensive. Uncovered and confronted by a large moving object, it rears, spreads the hood by extending elongated ribs behind the head, and orients toward the swaying instrument. The animal follows the movement of the pungi rather than its sound, which produces the appearance of dancing.
The practice is now illegal in India under wildlife protection law, though it persists, and captive snakes have historically been mutilated to render them safe. Separately, the spectacle mark on the hood is real, but its function is contested: whether it deters predators from behind, or is chiefly a species-recognition signal, has not been settled.