Capital outflows no major macro concern

Net portfolio outflows from Indian financial markets have picked up over recent weeks as the growing prospects of war between Ukraine and Russia and tighter global monetary policy have caused risk appetite to sour. Outflows from the equity market have been particularly severe and have reached levels not seen since the start of the pandemic, chiming with the 6% drop in the Sensex from its peak in January. Outflows could yet intensify if those twin threats continue to build. If outflows do pick up, they wouldn’t put macro stability at immediate risk given India’s large stockpile of FX reserves and small current account deficit. But if oil prices continue to surge and India’s terms of trade worsen, that will add to pressure on the RBI to take firmer policy tightening steps over the coming months.