FII money in itself can be a double-edged sword if not channelled properly and in a timely manner

Apna's existing investors Sequoia Capital India, Lightspeed India, Greenoaks Capital and Rocketship VC have also participated in the round.

In the face of any economic crisis, governments the world over look at central banks to bail them out. The great bailout in 2008/09 by the Fed in the US was one of the largest fiscal stimuli in its time only to be superseded by the global COVID stimulus. An estimated $20 trillion has been injected into the global economy through a combination of fiscal and monetary instruments in the past nine months. In India, the national lockdown and the eventual contraction in the economy led to demand compression and almost paralysed any investments while increasing the demand for short term liquidity. The Indian government responded through a $270 billion economic package in conjunction with the RBI aggressively cutting rates (the repo rate by 115 bps and the reverse repo by 65 bps in 9 months).

The nebulous virus situation led to banks turning extra-cautious on disbursements. Credit growth was only 5.8 percent in the quarter ended September 2020. This despite nearly $27 billion being sanctioned under the Emergency Credit Line Guarantee Scheme (ECLGS) of the Government. A combination of these stimuli with negligible credit offtake led to a glut in liquidity in the economy – the estimated liquidity with the RBI is upwards of $100 billion as of date.

The impact of the liquidity overhang is visible on the ground. AAA rated corporates are borrowing short term funds at below the reverse repo rate; 10-year government bond yields are down to 5.95 percent (despite high and sticky inflation) and the surfeit of liquidity is driving the equity markets to all-time highs. Given that the equity risk premium is at an all-time low, valuation multiples have expanded. Excess liquidity is also driving up savings and deposits in banks (up 11 percent YoY). Thus, while the overall costs of liabilities for financial institutions has come down significantly (about 250-300 bps on average), they are struggling to find avenues to deploy capital.

Given the legacy issues with NPAs – most lenders are keen to back only high-quality credit – thus disbursements are likely to be flat at best for most financial institutions. The weakness in the US dollar coupled with the surfeit of global liquidity is driving global investors to the Indian markets. FDI is likely to exceed $50 billion this year while FPI flows into equity (around $20 billion of net equity investments YTD) are likely to reach record levels.

The challenge is that the ecosystem does not have adequate absorption capacity for this liquidity. Government and private investment are the core users of credit demand. While Government expenditure should pick up pace in this fiscal, private sector investment is likely to be weak. This may sound counter-intuitive specially when borrowing rates are at a historical low. However, in the absence of tangible, sustainable demand few corporates will risk significant investments. An opportunity like this need not be wasted.

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Ritesh Chandra

Managing Partner|Avendus Future Leaders Fund

A virtuous cycle of investment-led demand needs to be created with the government acting as a catalyst. The recently instituted sector specific Production-Linked Incentive (PLI) scheme is an example of 'assisted and accelerated investments'. The scale of such initiatives can be ramped up manifold. Asset creation in sectors like agri infrastructure, railways, urban and rural healthcare networks, smart cities, large infrastructure projects can be initiated with incentivisation for local procurements and timely completion.

The trickle-down impact of such projects will be enough to create demand and lead to a self-perpetuating cycle of growth. Liquidity in itself can be a double-edged sword if not channelled properly and in a timely manner. India is a capital hungry nation and there could not be a better time to fuel its animal spirits.

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