Actually, if you were to describe the rise in the market this week in one word, it would be “liquidity.” OK, FPIs were net sellers in the week, but they did turn net buyers on the last day and also bought into debt. But the real reason for the spike was not just about flows but about the impression that the liquidity taps were once again being opened by the US Federal Reserve. That is what came out of the Fed monetary policy that was presented on 19-March. It was not the status quo on rates, but liquidity boost. 

The Fed balance sheet had reached a peak of $9.2 trillion after the pandemic, so Fed has been steadily buying back bonds since early 2022. It started with $90 billion a month, then reduced it to $60 billion a month last year, and the latest Fed policy has further reduced it to $40 billion. That means, the Fed is satisfied by the balance sheet reducing to $6.7 trillion and sees it fit to infuse more liquidity into the system. Such a liquidity infusion normally provides a boost to assets in emerging markets, and that is exactly what we saw in the Indian markets. It may not really last! 

However, Indian investors must pause before celebrating this temporary surge in liquidity. The latest quarterly macro updates presented by the US Fed, along with the Fed policy statement, has some key concerns. For 2025, the GDP growth estimate has been lowered by 40 bps to 1.7%. At the same time, unemployment has increased by nearly 10 bps to 4.4%. To add to the woes, the core inflation in the US is expected to be higher by 30 bps at 2.8%, against earlier estimates. The moral of the story is that, the US economy looks far from being in fine fettle and that is not great news for the world economy. It is unclear if the stiff US market valuations can be supported by an uncertain economic situation. That remains a key challenge for India. 

Indian investors must take the recent really in the stock markets with a pinch of salt. It is more of a one-week rally after close to 4 months of persistent selling in markets. Most of the macro issues are still there. Indian growth is still sluggish, valuations are stiff, the quarterly numbers are under stress, and operating margins are squeezed. FPI flows are still elusive and we have not even started seeing green-shoots of FPI flows coming back. The rally this week looks like a knee-jerk reaction to the good news on liquidity. Investors must not read too much beyond that point!