Liquidity Flush Keeps NIFTY New High Hope Alive

 

Everyone is betting and thinking about the Indian economic growth post the 2nd wavenumbers coming down and also where the market is heading. It is also heard that investors and every financial market player are finding a complete disconnect between rising covid numbers and the stock market. Well, the stock market is driven by liquidity. It’s the liquidity and forward-looking liquidity inflow which keeps the gap widening between the economy and the stock market.

 The 1st wave impact on the corporate profit have been mixed but the blue moon surprise has been that corporate revenue to GDP also inched up to 34.4 per cent in FY21, up from 33.6 per cent in FY-20.  The combined net profit of the listed companies was up 57.6 per cent to ~5.31 trillion in FY21. We must understand that all unnecessary cost and administration cost which are of fixed nature have either been re-negotiated at a lower level or have been reduced completely.  The benefit of the same is for the long term. Work from home business process reinvents the cost structure for corporate India and drives corporate profits.

 The much hyper related to NPA have kept the market under buzzer mode. Well ECLGS 1.0, ECLGS 2.0 and ECLGS 3.0 -- have been extended up to June 30, 2021, or till guarantees for an amount of Rs 3 lakh crore are issued, the ministry said. The last date for disbursement under the scheme has been extended to September 30. These have helped banks to have a high casa ratio.  Scheduled commercial bank (SCBs) mobilised Rs.1.2 trillion in 2020-21 as compared to Rs.1.6 trillion in 2019-20.

 This implies a decline of 25.6 per cent. Fund mobilisation through the issuance of fresh equity by banks declined by 42.1 per cent to Rs.739.8 billion from Rs.1.3 trillion in 2019-20.  This means SCB are better placed and ample liquidity in the system. The Indian banking system is well placed and the retail segment is also now being taken care of through ECLGS. The Finance ministry has managed the NPA and banking system very judiciously.

 On the other hand the combined net profit of BFSI companies was up 79.3 per cent in FY21 to a record high of Rs 1.49 trillion as banks saw a sharp rise in their margins or spread, thanks to a decline in their interest cost.

 The market is flush with liquidity as cash-flows have been managed significantly and also raising of funds from the different sources. Non-banking enterprises increased- they mobilised Rs.10.3 trillion through a primary market in 2020-21,. Funds raised in 2020-21 were 30.2 per cent higher than the Rs.7.9 trillion raised in 2019-20. At the same time, issuances of debentures peaked at Rs.8.6 trillion during the year. These were 31.6 per cent higher than debentures issued in 2019-20, of the order of Rs.6.5 trillion.

 The numbers speak that corporate avoided the banking space and opted for other sources for capital. This is going to be repeated again in this financial year. On the other hand, cut their exposure to external commercial borrowings (ECBs) in 2020-21, according to the data released by the RBI. They mobilised Rs.2.6 trillion through ECBs in 2020-21, which was 30.2 per cent lower than the preceding year’s ECB fundraising of Rs.3.8 trillion. The currency impact is controlled for the future and also during the present time as a liability of ECB rollover is low.

 Large companies their exposure to the scheduled commercial bank (SCB) by Rs.196 billion during 2020-21 to the tune of 75%.  Banks were flush with funds in 2020-21 to record deposit mobilisation of Rs.15.4 trillion. This was 55.6 per cent higher than the deposits mobilised during 2019-20. This fund is awaited to be deployed into the market hence liquidity is significant in the market and also the sources. SCBs utilised only 37.7 per cent of the money mobilised through deposits for lending purposes in 2020-21. Hence SCB is flushed with liquidity for corporate India.

  The liquidity inflow, significant available options to raise further capital, better-managed NPA, higher CASA ratio, healthy monsoon, restructured cost structure for the corporate, significant pent up demand and new business models drive the Market forward outlook.  Inflation is just time-based inflation which will disappear over time. The demand and liquidity drive the game.     

 Coming to Investments it’s time to take a contra call and build your portfolio for the unlocking phase of India. The factors which drive the liquidity and the forward outlook play a critical role behind Nifty to reach 17000.