External factors and domestic monetary policies play tug of war on the FCI

Continued monetary tightening domestically has kept financial conditions under pressure in India, despite some respite from external headwinds. Different sub-segments of financial markets have reacted differently to the contrasting domestic and external cues. In July, CRISIL’s Financial Conditions Index (FCI) stayed put at the same level as June and within the defined comfort zone. On a trend basis though, the FCI tightened steadily since October 2021.

FCI — based on 15 parameters across money, debt, equity and foreign exchange markets, policy, and lending conditions — came in at -0.7 in July, close to previous month. A value below 0 indicates tighter conditions than the long-term average¹, and a value below 1 standard deviation indicates significant tightening.

The shock of the Russia-Ukraine war is getting replaced by growing concerns of a global economic slowdown. For domestic financial markets, this has brought a mix of positive news (falling commodity prices) and negative news (strengthening dollar). Reserve Bank of India (RBI) has been steady on rate hikes and withdrawal of excess liquidity and tightening bias continues as inflation remains above the upper tolerance band of 6%.

¹ Average since April 2010