My 3rd blog in the Gurudakshina series. A thread 🧵
Haven't you heard -
"Stocks are going up because there is so much liquidity.”
“Valuations are high and will remain high because there is a flood of liquidity.”
What’s this ‘Liquidity’ that Everyone Keeps Blaming?
Read on
Haven't you heard -
"Stocks are going up because there is so much liquidity.”
“Valuations are high and will remain high because there is a flood of liquidity.”
What’s this ‘Liquidity’ that Everyone Keeps Blaming?
Read on
Liquidity is blamed for any and everything, usually. Bulls love it, bears blame it. But one thing is common. When you ask investors – “What is liquidity?” - what you get in return are empty stares, smiles, or at best, fund flows or traded volumes data.
Have you ever asked this question to yourself? What is liquidity and how to define it?
In a corridor conversation early in my career, I was often told that the flood of money brought forth by quantitative easing is going to lift the markets like never before.
In a corridor conversation early in my career, I was often told that the flood of money brought forth by quantitative easing is going to lift the markets like never before.
On other occasions, derivative traders mentioned the open interest rising with rising volumes and termed it ‘long buildup’ in a stocks. It was an indication that the ‘strong hands’ in the market liked this scrip.
One of the most familiar references to liquidity is usually the FII and DII flows. It is a common practice to state these as the primary, and for most investors, the only tool to measure ‘liquidity’ in the stock market.
This confused and perplexed me so much that I wrote a simple cheat sheet to tell myself what liquidity is. Here it is –
Liquidity, the most potent and important source of market moves, is of three primary types –
Liquidity, the most potent and important source of market moves, is of three primary types –
1. Market Liquidity
Fund flows from foreign institutional investors, domestic institutions including mutual funds and trends in retail investments
Total traded value of stocks
LAS book size
Options open interest and volume trends
Traded volumes including delivery volumes
Fund flows from foreign institutional investors, domestic institutions including mutual funds and trends in retail investments
Total traded value of stocks
LAS book size
Options open interest and volume trends
Traded volumes including delivery volumes
2. Interbank Liquidity
Interbank liquidity refers to the surplus or deficit funds at any point that the banking system holds with the RBI, over and above statutory CRR requirements
Durable liquidity
Interbank liquidity refers to the surplus or deficit funds at any point that the banking system holds with the RBI, over and above statutory CRR requirements
Durable liquidity
3. Credit availability and off-take
Credit growth and the ability of the banking system to lend
Money supply trends and their impact
Credit growth and the ability of the banking system to lend
Money supply trends and their impact
The above triad structure presents a comprehensive way of looking at not only one part of liquidity impacting the markets but a complete picture of how liquidity manifests in financial markets and the economy.
Let’s look at each one of these in brief.
Let’s look at each one of these in brief.
To read a comprehensive take on all these segments and to know where we stand today please read the full article here - dspim.co/LiqB
@dspmf
@dspmf
• • •
Missing some Tweet in this thread? You can try to
force a refresh
