Omicron spread casting shadow on capital inflows

New Delhi: 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 (FPIs) 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."