India's apex bank on Thursday said the foreign portfolio investors (FPIs) inflows might be impacted by the spill-over effect from the monetary policy stance in advanced economies.
"While foreign portfolio flows to India have been strong during the past year, unexpected changes in AEs monetary policy may lead to slowdown, reversal of such flows with implications for segments of financial markets," the Reserve Bank of India (RBI) said in its financial stability report (FSR) for June 2015.
Data with the National Securities Depository Limited (NSDL) showed a whopping increase of 437 percent in the total investment inflows last fiscal which stood at Rs.277,461 crore from Rs.51,649 crore in 2013-14.
The FPIs invested Rs.111,333 crore in equity and Rs.166,127 crore in debt markets during 2014-15.
"India is though better prepared to deal with the volatility, as compared to previous episodes," the report said.
The RBI has been building up its foreign reserves to counter any future financial shocks and slide in rupee value like the one which was witnessed in 2008 and June 2013.
India's foreign exchange reserves stood at $354.28 billion for the week ended June 12.
The report cited threats from a possible Greek debt default and uncertainty over the timing of rate increases by the US Federal Reserves.
At present, parleys are continuing to resolve the Greek debt crisis as the deadline for Greece to make debt payments to the International Monetary Fund (IMF) is scheduled for June 30.
The RBI is also cautious about the US Fed's stand that the rate hike might take place later in the year.
With higher interest rates in the US, the FPIs are expected to be led away from the emerging markets such as India.
The report pointed out significant improvements in the macroeconomic environment and economic performance is expected to be better.
On the banking sector, the apex bank noted that concerns remain over the continued weakness in asset quality indicated by the rising trend in stressed advances ratio of scheduled commercial banks (SCBs), especially of public sector banks (PSBs).
"Macro stress tests suggest that current deterioration in the asset quality of SCBs may continue for a few more quarters, and PSBs may have to bolster their provisions for credit risk from present levels, to meet the ‘expected losses’ if macroeconomic environment were to deteriorate," the report elaborated.
The bank stressed on the need to focus more on the agricultural insurance sector in the wake of frequent episodes of weather related calamities and their impact, particularly on small and marginal farmers.
"There is a need to harmonise the regulation of physical commodities market and strengthening the linkages between the derivatives markets and physical (cash) markets, mainly in agricultural commodities," the report added.