Rising Covid cases globally have the potential to impact capital flows as well as heighten inflation, said India Ratings and Research (Ind-Ra).
Accordingly, the agency cited that uncertainty related to a third Covid wave has already started showing signs in equity markets.
It pointed out that foreign portfolio investors were the net sellers in the Indian markets to the tune of Rs 103 billion in November 2021 while the net sell-off in debt has been Rs 27 billion during the month.
"One of the main reasons for the sell-off has been concerns over the global inflationary pressure and higher risk of Covid-19 in some of the developed economies," the agency said in its credit market tracker report.
Besides, the agency said that there could be an adverse impact on the society because of a successive lockdown, and particularly when the domestic growth condition is still not broad-based but capex cycle is showing green-shoots.
In terms of capital flows, it noted that the hardening domestic inflation and a reversal of the ultra-loose policies in advanced economies have built up pressure on the Reserve Bank of India (RBI).
The Monetary Policy Committee earlier this month left interest rates unchanged and reiterated that policy support was needed to ensure sustainable economic growth.
"However, the RBI has been actively operating through changes in the market micro structure by taking steps to nudge money market rates towards the benchmark policy repo rate rather than the reverse repo rate."
Consequently, the RBI announced a three-day variable rate reverse repo auction, instead of seven- or 14-day auction; the auction saw banks park Rs 811.60 billion as against the notified amount of Rs 2 trillion.
"The cut-off rate for variable rate reverse repo has come closer to the 'Repo Rate', in sync with the rising overnight rates and drained-out liquidity, while money market rates have moved up."
"Overall, the rates have inched up by 20 to 50bp depending on the tenure and credit profile."
Furthermore, the commercial paper issuances by corporates in November 2021 remained benign at Rs 727 billion due to no immediate need for funds and a timid demand, whereas the issuances by non-banks increased to Rs 1,616 billion in November 2021 from Rs 292 billion in October 2021.
"The number of ultra-short-term commercial paper issuances has increased; concentration of issuances in the seven-day bucket is largely due to the initial public offer financing in the equity market. Easy liquidity had kept the yields low across the buckets in November 2021," the report said.
In addition, 'Certificates of Deposits' (CD) issuances by state-owned banks in the primary market remained subdued due to prevailing high liquidity in the banking system and low credit offtake, whereas issuances by private banks increased by Rs 30 billion in November 2021.
"Loan growth also remained muted due to the lack of demand for big-ticket loans from companies, while banks stayed cautious in the anticipation of rising asset quality stress due to the Covid-19 pandemic and skyrocketed commodity prices."