The report said: With the return of inflation worldwide and the raising of policy rates by several central banks, reversal of the existing ample international liquidity conditions would impact domestic financial markets. The central bank further said that as interest rates transit to a more neutral level, market participants could face the need for re-balancing of portfolios.
In the first quarter of 2004-05, markets experienced comfortable liquidity conditions, notwithstanding signs of a slowdown in external inflows. With the call money rates generally remaining at sub-repo levels, the turnover in this segment is expected to decline as the participants increase their presence in the other money market segments. Despite a modest depreciation of the rupee against the dollar in the first quarter, the RBI pegged as stable in the near-term, the conditions in the foreign exchange market. However, the RBI warned that the domestic price situation and global interest rate movements would have implications for yields in the gilts market in 2004-05.