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Outlook for Indian financial markets highly uncertain, says RBI

Better transmission of monetary policy impulses would remain a priority, says RBI.

Last Updated: Apr 09, 2020, 02.04 PM IST
Growing risk aversion across the world triggered heavy selloffs in equity markets, including in India in March.
NEW DELHI: The Reserve Bank of India (RBI) on Thursday said the outlook for domestic financial markets is highly uncertain, given the strong capital outflows.

A sharp moderation in global crude oil prices, reports of a spike in Covid-19 cases in India, strain on the banking sector caused by the distress of a private sector bank, and growing worries about global economic recession led to bearish momentum in the domestic stock market, the RBI said in its April Monetary Policy report.

The stock market was buoyant till mid-January against the backdrop of a fall in oil prices, recovery in industrial output in November, higher GST collection and expansion in manufacturing PMI in December, which pushed Sensex to a record close of 41,953 on January 14.

But growing risk aversion across the world triggered heavy selloffs in equity markets, including in India in March, the RBI report added.

Since January 14, BSE Sensex has fallen 26 per cent.

In case of bonds, yields softened in early March due to unscheduled reduction of 150 bps (in two phases) by the US Federal Reserve in its policy rate, and fall in crude oil prices due to Saudi Arabia increasing its supply. They hardened thereafter due to crude prices firming up in the wake of the US pledging fiscal stimulus to arrest the pandemic, a sharp depreciation of the rupee triggered by Covid-19 driven panic sales by FPIs; and fears of global recession triggering a shortfall in global dollar liquidity.

“Yield on the new benchmark, however, fell by 15 bps with announcement of OMO purchases on March 20. The fall in yields was transient as the rupee depreciated to a new record low; and shrinking G-sec volumes exacerbated the fall in prices. In the backdrop of Covid-19 related stress, the RBI announced several measures on March 27, 2020. Overall, the new benchmark fell by 23 bps in March,” RBI said.

The central said that domestic financial markets remain vulnerable to global developments, deepening of the growth slowdown in India and rising concerns about Covid-19.

The outlook is characterised by heightened uncertainty with capital outflows continuing and exerting pressures on the rupee, which is increasingly getting reflected in bond market yields.

The domestic currency has depreciated 6.2 per cent vis-à-vis the US dollar during September-March period, which was modest in comparison with many EM peers such as Thai baht, Argentine peso, Indonesian rupiah, Turkish lira, South African rand, Mexican peso, Russian rubble, and Brazilian real.

Better transmission of monetary policy impulses to the credit market would remain a priority, the RBI said.

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