Liquidity is one of the most important indicators, that greatly influences stock market development and efficiency. It is one of the factors affecting the price discovery mechanism. A market is considered to be liquid when large volume of trades can take place without any significant effects on price. When an investor is able to transact at a price close to the current market price in the stock market, the market is liquid.

Liquidity is an important parameter taken into consideration by foreign institutional investors for investing in a market. A highly liquid market implies higher FII inflows and reduced liquidity implies lower FII inflows, reduced market capitalisation, poor sentiments and inability of market participants to transact easily. Moreover corporates are also unable to raise money from the markets for investment.