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Improved economic environment in 2HFY21 and the Centre's focus on higher spending especially on infrastructure will give a boost to FY21 credit growth, India Ratings and Research (Ind-Ra) said.

The agency's February 2021 edition of its credit market tracker showed an upgrade to its FY21 credit growth estimates to 6.9 per cent from 1.8 per cent.

Accordingly, the agency said that amid the pandemic, the credit offtake in the banking system has remained muted, which led to lesser issuances of certificates of deposits (CDs).

"The CD issuances for January 2021 increased for public sector banks, whereas that for private banks have remained muted. Concurrently, the CD yield across maturities was confined to a narrow range, amid subdued issuances. Similarly, the issuances of commercial paper (CP) by corporates have fallen, due to a lesser requirement amid fewer rollovers.

"The CP yields however have largely seen an upward revision, owing to the Reserve Bank of India's announcement of the restoration of liquidity management operations."

Besides, demand from fund houses for corporate bonds and short-term funds has increased by "Rs 52 billion and Rs 10 billion, respectively".

On the other hand, the agency said that CP issuances by non-banking financial companies and housing finance companies have remained encouraging, both in terms of total amount and volumes.

"The agency believes that the normalisation of economic activities and a conducive rate environment remain supportive for this segment."

"On account of the excess liquidity in the system, a similar trend has been observed in CD-overnight index swap negative spread which is showing green shoots in the credit demand."

Furthermore, Ind-Ra cited that net foreign portfolio investments in equity declined in January 2021, "whereas the net investments in the debt segment was around negative Rs 25.18 billion".

"India along with other emerging countries such as Taiwan and South Korea saw a large sell-off by foreign portfolio investors during the month.

"Investments by mutual funds in non-convertible debentures have improved; on the other hand, investments by mutual funds in CPs and CDs have declined, in banks and corporates specifically."