Amid deteriorating global financial conditions, the Reserve Bank on Monday warned that both the equity markets as well the battered rupee are likely to be more under pressure going forward.
"On the domestic front, falling corporate earnings at a time when corporate positions are already leveraged, could keep equity markets under pressure," the RBI said in a report on Macroeconomic and Monetary Developments, released on the eve of the monetary policy announcement.
It pointed out that global uncertainty continues to exert pressure on the rupee. "While currency pressures have currently abated, uncertainty remains ahead with the global risk aversion being high and the external sector weakening," the central bank said.
The rupee is currently hovering at 55.60 to the dollar, which is around 10 per cent fall from its April level, and around 25 per cent since last August on the back of higher fiscal and current account deficits coupled with global uncertainty.
The RBI said stressed financial condition is likely to continue worldwide due to certain developments like the Libor scandal, money laundering cases by some leading global banks.
Referring to the ongoing eurozone crisis, the report said the longevity of Greece in the European Union and Spanish banking problem pose risks to the financial stability of this region in particular and global financial markets in general.
It noted that subdued growth in advanced economies and concerns in the eurozone area have resulted in negative FII inflows to emerging economies.
However, the Central bank remains optimistic about positive inflows from FIIs in the second quarter.
About overall liquidity situation in the economy, the RBI said liquidity situation has improved in the first quarter, as reflected in easing call rates and G-Sec yields.
The yield on the benchmark 10-year treasury bill, which was 8.57 per cent in April, has now fallen to around 8.12 per cent.
The RBI, however, said deposit rates remain sticky, a reflection of higher costs of funds and inflation.