India in 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 USD 3.9 billion, the highest ever for any month, and if ETFs are included, the figure stood at USD 4.1 billion.

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

"By the end of the month (August), equity mutual fund AUM stood at USD 111 billion, and as a percentage of market cap rose to 5.3 per cent, its highest level since July 2000.

Similarly, equity ETF assets rose to new highs of USD 8.4 billion," the report added.

Moreover, fixed income funds remained positive with inflows of Rs 356 billion. On a year-to-date basis, fixed income infusion, at USD 19 billion, is close to equity flows.

At August-end, fixed income AUM rose to USD 211 billion, from USD 202 billion in the previous month. The total AUM for the MF industry stood at USD 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 USD 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 USD 30 billion at the end of July. We estimate their equity assets to be at USD 3.5 billion," Morgan Stanley said, adding that "as per our estimate, EPFO could likely invest Rs 250-300 billion in equities in fiscal 2018, of which Rs 57 billion have been invested this year thus far".

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