While the domestic money and bond markets remained relatively unaffected by the external environment, forex and equity markets have witnessed higher volatility due to the developments on both domestic as well as the global fronts in the January-June period, RBI said on Thursday.

"While the domestic money and the bond markets remain relatively unaffected by external turbulence, the foreign exchange and equity markets have witnessed high levels of volatility," RBI said in the Financial Stability Report (FSR) released here on Thursday. The falling momentum in domestic growth as well as the rising current account deficit along with the growing fiscal deficit are eroding the investors' confidence, it added.

"Developments in the Euro area and deterioration in the global macroeconomy were among the factors that contributed to stress in the domestic foreign exchange," the report said, adding that banking sector funding, debt and equity markets remained unaffected. The rupee has lost nearly 7 percent since January against the dollar due to higher demand for the greenback and low capital inflows.

The FSR, however, pointed out that bond market remained largely insulated from overseas pressure. "Though the government bond yields rose marginally on the news of change in the rating outlook (Fitch and S&P rating on India and 11 banks), it quickly retraced," it said.

The report noted that the rating change may impact the cost and availability of foreign currency borrowings. "A change in the current external rating of the country could have 'cliff effects', impacting both, the availability and the cost of foreign currency borrowing for domestic banks and firms," the report said. Liquidity condition has improved in the recent past after tightness in March, it noted. It also said that certain instances of extreme volatility and disruptions in the stock market were due to algo and frequency trading.