Is it true that the Nifty rally to 14,000 has been largely driven by liquidity flows?

That is correct to a large extent. If you look at just the FPI flows, it was to the tune of $23 billion during the year which is nearly Rs.167,000 crore of money coming in. Out of this, nearly Rs.125,000 crore just came in the months of November and December. That is the kind of liquidity that has driven the markets.

Where did this liquidity of the FPIs come from? In the 5 months post the pandemic, the US Fed infused $3.5 trillion through monetary and fiscal measures. That is the same amount that the US Fed infused into the markets in the five years after the 2008 financial crisis. Also, remember that the US was not alone but even the UK, EU, Japan, China and India joined.

The overall liquidity infusion through fiscal and monetary measures was $20 trillion globally. Not surprisingly, much of this money found its way into equities and as a result the FPIs became bolder and also risk on in the emerging markets like India. After the US elections, risk-on liquidity was a key driver for the Nifty rally.