India in the midst of domestic liquidity supercycle: Morgan Stanley

Equity markets are in the middle of strong capital inflows and the “dream run” may just be starting as India makes the most of “domestic liquidity supercycle”, says a Morgan Stanley report.

According to the global financial services major, August recorded 17th straight month of positive flows.

Domestic equity mutual funds received inflows of $3.9 billion, the highest-ever for any month, and if ETFs are included, the figure stood at $4.1 billion.

Year-to-date, domestic mutual funds have received equity inflows of $18.6 billion, while ETF infusion so far this year stood at $2.6 billion, it said.

“By the end of the month (August), equity mutual fund AUM stood at $111 billion, and as a percentage of market cap it rose to 5.3 per cent, its highest level since July 2000. Similarly, equity ETF assets rose to new highs of $8.4 billion,” the report added.

Moreover, fixed income funds remained positive with inflows of Rs 35,600 crore. On a year-to-date basis, fixed income infusion, at $19 billion, is close to equity flows.

By August end, fixed income AUM rose to $211 billion from $202 billion in the previous month. The total AUM for the MF industry stood at $322 billion — a record — it added.

“We remain of the view that India is in the midst of domestic liquidity supercycle,” Morgan Stanley India strategists Ridham Desai and Sheela Rathi said in a research note.

The report further noted that NPS’ equity assets are expected to be at $3.5 billion, while EPFO has raised its equity allocation to 15 per cent in 2017-18 from 10 per cent in 2016-17.

“NPS’ pension assets stood at $30 billion at the end of July. We estimate their equity assets to be at $3.5 billion,” Morgan Stanley said, adding that “as per our estimate, EPFO could likely invest Rs 25,000-30,000 crore in equities in fiscal 2018, of which Rs 57 billion have been invested this year thus far”.