The Indian markets are showing tremendous strength right now. This strength is evident in the indices, as they barely correct even for bad news and quickly recover, only to trend higher. The domestic liquidity is a significant driver behind this resilience, and it is likely to last as long as the liquidity continues.
However, the liquidity is being absorbed at a faster rate than it is currently forming. The demand for capital from promoters and large institutional sellers is rising sharply. Interestingly, even companies that do not necessarily need capital are seizing the opportunity to raise funds, taking advantage of the liquidity available. Promoters are also increasingly keen to raise capital for their personal balance sheets, leveraging the favorable market conditions.
At some point, this excessive demand should lead to the domestic liquidity running dry. Yet, the markets are not currently pricing in that scenario or expressing concern about the possibility. Instead, the sentiment seems to be one of complacency—enjoying the present momentum without much worry about the potential consequences. The abundance of liquidity is clearly playing a supportive role in maintaining this bullish sentiment.
As long as there is adequate liquidity and sellers continue to raise capital with ease, domestic sentiment should remain strong and stable. However, such phases often change suddenly. Usually, the shift is triggered by a major capital-raising effort that fails or an unforeseen event that disrupts the market and causes a sharp reset in sentiment.
Currently, there are no visible signs of such a disruptive event on the horizon. But history shows that markets tend to catch investors off guard, especially when they are least expecting it. This makes investors vulnerable to sudden shifts and sharp corrections, particularly when they are unprepared.
Given this backdrop, it is a time to stay cautious and invest strictly based on valuation merits. Equity selections should be made with precision and thoughtful analysis. It’s also an opportune moment to pull liquidity out of overpriced segments of the equity market. Right now, investors seem unwilling to think beyond equity, but this year may reward those who adopt an asset-allocation-driven approach instead of clinging to a singular equity bias.