Liquidity is not institutional flows, for sure. If anything, institutional flows lagshare prices, and liquidity is mostly a coincident indicator. In practice, flows arealways net zero, so looking at one side of a trade, such as what institutions aredoing in the market, is flawed. Liquidity, in our view, is the relative force betweenthe bid and the offer. If the bid is stronger than the offer, then liquidity is judgedto be good, and share prices rise and vice versa. The source of liquidity isconfidence in growth and macro stability. Where such confidence comes from is amystery to market participants using reported data to understand share prices,as this confidence is about the future and not about trailing data. That said,reported data plays some role in shaping up confidence about the future.    Bottom line is liquidity (the strength of the bid) is rising when the confidenceabout the future is rising. When this confidence is too high, share prices get ripefor a concerted fall. Are we there? To answer this question, we need to firstmeasure liquidity. We offer four metrics: a) the gap between the change intrailing P/E and earnings, b) the gap between India's earnings yield and the UStreasury yield, c) our proprietary financial conditions index, and d) the differencebetween the YoY change in share prices and YoY change in M2 growth. The logicfor these indicators is inside this note. Given the ephemeral nature of liquidity,none of these measures is water tight in its ability to depict liquidity fully. Thatsaid, they are currently not suggesting excesses that would point to a significantcorrection in Indian equities.

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