Recent spike in Covid-19 cases along with associated lockdowns could disrupt FPI inflows: Ind-Ra

12 Apr 2021 Evaluate

India Ratings and Research (Ind-Ra) in its latest report has stated that the recent spike in Covid-19 cases along with associated lockdowns, though localised, could disrupt foreign portfolio investments as well as domestic credit markets. It said India's second round of Covid outbreak is moving in a direction different from the global trend.

The report said ‘The cases seem to have abated in major countries and the massive vaccination drive is expected to anchor any meaningful surge. Therefore, the counter trends coupled with spurt in daily cases would be the cause for concern in the near term’. It said ‘While the mortality rates have remained benign, the infection rate is increasing at a much faster rate than earlier’. Notably, the agency expects that India's vaccination drive would minimise the impact, the duration would be a function of its pace.

However, the agency cited mounting Covid-19 cases in India as opposed to benign conditions in advance economies could have an adverse effect on the investors' risk appetite. It said ‘Also, a sharp economic recovery and reflationary trend have already been causing a rise in global yields. This also is a negative factor for risky assets such as equity’. It also said foreign portfolio investments (FPIs), especially into the equity, have been reasonably strong in recent months, any reversal from the trend however could destabilise the ongoing favourable conditions across the financial markets.

Similarly, for the domestic credit markets, the agency said that amid a cautious financial system, the condition was improving, allowing low rated issuers to access capital though at a significantly high cost. Some of these gains could reverse and risk aversion could increase. The agency believes conducive financing options is necessary, and volatile capital market condition impinges such proposition. The agency however also believes the enormous banking system liquidity and proactiveness from the Reserve Bank of India will alleviate the risk of a market failure.

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