Liquidity surplus but contracts with gradual unlocking of economy: Ind-Ra

Mumbai (Maharashtra) [India], September 1 : The system liquidity though still in surplus territory contracted to average Rs 3.5 lakh crore in July from above Rs 5 lakh crore in June, India Ratings and Research (Ind-Ra) said in its latest edition of credit market tracker.
This was due to rising cash-in-circulation, foreign portfolio investment (FPI) outflows and moderation in ways and means advance availed by the Centre and states.
The gradual unlock of the economy and the businesses resuming operations might have led to drawdowns in terms of working capital facilities or business loans.
"Since the beginning of lockdown in India, there has been a considerable rise in the cash-in-circulation, largely because of increased cash holding by people amid the crisis. Interestingly, the rise in cash-in-circulation levels seems to have peaked in July," said Ind-Ra.
The global capital market has been volatile in the past few months. After witnessing encouraging equity FPIs in May and June, the equity FPI flows contracted 65 per cent on a month-on-month basis in July.
On the other hand, the deteriorating macro-variables across most of the emerging economies where Covid-19 cases remained elevated discouraged particularly the debt investors due to heightened credit risk.
Hence, the debt FPI investments have remained in negative zone, meaning shorting or unwinding their exposures.
For the first time since January, the assets under management of mutual funds have increased across all the schemes in July, reaching a total of Rs 12.64 lakh crore -- the highest since the beginning of FY20.
Liquid schemes registered the highest gain in assets under management during July followed by short-term funds.
The money market segment has been on the recovery path as is visible from the increasing number of issuances. Ind-Ra said that in the absence of any credit events and supportive regulatory stance, investors are turning cautiously optimistic.
Moreover, the abundant system liquidity and muted issuances have added to the sentiment. Commercial paper rates for the top-rated corporates, non-banking finance companies and housing finance companies and policy institutions have remained around repo rates.