Why Indian Market is Good in Quality

This is a period when liquidity is high across the world. It is contributing to asset prices going

up. It is that rare period when gold prices, bonds, equity indices are all at multi-year highs.

This is happening because of the following factors:

 Large liquidity infusion by central bankers:There is surplus liquidity in the system and

this has broken yields to close to zero in many parts of the world. Central banks 􀂅ooded the

system with liquidity to reduce and then reverse the impact of the global 􀂄nancial crisis and

the euro zone crisis. This mechanism has been used to such an extent that the world now

expects the same response at the slightest whi􀂃 of a crisis. Countries where real interest rates

are meaningful are losing competitiveness in the market and are forced to also reduce

interest rates or provide incentives to compete.

The response of countries like China and Singapore has again been to increase liquidity in

the face of coronavirus scare. US Fed had started to reduce the size of its balance sheet, but

started raising it again.

This has kept capex spends low and the increased liquidity has

been channelled towards purchasing of 􀂄nancial and hard assets. Monetary and 􀂄scal

policies around the globe have now been focused on increasing consumption rather than

capex. However, consumption increases slowly over time, because to some extent it is

behavioural. This has been in sharp contrast to the past experiences, when savings and capex

were encouraged, which resulted in the success of Tiger and Dragon economies. The world is

seeing high availability of low-cost liquidity and most assets are seeing price appreciation

This would gradually lead to a reduction in interest/lending rates in India. A lowering of yields was witnessed right after

the Budget and it could continue. However, high hedging costs of foreign debt do mean the overall reduction in interest

rates in India would be slow even for the best of companies that can access foreign markets. Since the improvement

would be slow, it would give time for domestic investors to invest in the equity markets.

This leads us to some interesting conclusions:

The Indian growth story would bene􀂄t more from better global liquidity going forward.

Even domestic lending rates should drop. Infrastructure assets such as roads and airports provide a growing yield.

These assets would be attractive to global investors. The Budget has provided incentives to sovereigns to invest in

infrastructure assets and has exempted all incomes from such assets. This should help us get large FDI in

infrastructure and help us fund new assets by selling old ones.

The bene􀂄t of higher and cheaper global liquidity would accrue more to companies, which are able to access global

markets cheaply. Financials, able to raise hedged foreign money and lending at 􀂄xed rates domestically would see

margin expansion.

Yes, at some point in time, the availability of international low-cost credit may reduce. However, if by then, the domestic

market normalises, Indian economy and markets can continue to do well. This is because currently the international

USD 􀂅ows are helping address the liquidity stress in the domestic system (post ILFS) and is seen as a stop-gap

arrangement. An issue would arise if we see signs of a credit bubble in India, which is not the case at present.

Given the above, there is a good chance that the Indian markets, both debt and equity, will continue to do well in the

foreseeable future. The key factor to watch out would be the direction of global interest rates and normalisation of Indian

credit markets in terms of its ability to access monies by various market participants. We believe the better quality part of

the market can continue to do well in the immediate term as it is better placed to access international markets.