Within a few weeks, Indian markets have seen nearly five billion dollars of equity flows. FIIs have been flooding our markets with liquidity. This money is going into select large cap index names. The velocity of investment is abnormally high in growth-delivering businesses. This explains why only a select club of companies is rising continuously while the broader market is actually not doing much. While this trend within the Nifty is visible, there is also high retail participation in small caps and micro caps.
Effectively, liquidity is driving the market both at the top and the bottom. Predicting when this liquidity will ebb is never easy. Markets will remain liquid longer than we expect it to. Therefore, investors must choose how best to utilise this liquidity.
A vaccine is in sight and there is a plan in the works to vaccinate all citizens. We also have a blistering reforms plan pipeline. India’s economy should come out stronger from COVID. But the gestation period of recovery could be longer than markets expect.
Liquidity is making markets ignore this gestation. Whenever the market realises the arduous nature of the recovery journey, it will start to factor in the wait. For now, the markets are simply soaking in the global liquidity. The boats are enjoying the rising tide.