Stress from the debt-ridden euro zone area had spilled over, leading to increased volatility in domestic markets, the Reserve Bank of India (RBI) said in the Financial Stability Report released on Thursday.
RBI said among domestic markets, the equity and foreign exchange markets have experienced severe stress in recent months. "A forecast of the Financial Markets Stability Indicator suggests the continuance of the current conditions until March 2012," the RBI said.
The rupee has depreciated close to 20 per cent against the dollar since August. Last week, the Indian currency touched fresh lows for four consecutive days, following which the central bank announced a slew of measures to increase foreign currency inflow and cut artificial dollar demand in the market.
RBI said the sharp depreciation of the rupee was driven by global dynamics. "It has been clarified that the policy aims to manage volatility in the exchange rate and ensure the exchange rate volatility does not impair macroeconomic stability," said RBI. Further movement in the exchange rate would depend on the developments in Europe.
The external sector has become more vulnerable, due to the rupee’s falling trend, the widening current account deficit and the rising net international liability position. However, these factors are not a cause for undue immediate concern, RBI said in the report.
The central bank had flagged concerns on redemption of foreign currency convertible bonds (FCCBs) raised by Indian companies in the previous report released in June. "The environment for carrying out refinancing of FCCB liabilities by firms over the next few quarters has worsened due to correction in domestic equity markets, the depreciation of the Indian rupee and the rise in domestic interest rates," the report said. Going forward, translation and transaction exposures that remain unhedged could lead to hardships for some firms, the central bank added.
It said the recent crisis in Europe was likely to have an impact on flows under external commercial borrowings. Net claims of non-residents on India stood at $233.6 billion in the quarter ended June, an increase of $14.2 billion over the quarter ended March, it said.