Global cues turn positive but domestic financial conditions tarry

• Domestic financial conditions eased slightly in in November relative to previous month, but remained a bit tighter than long-term average, CRISIL’s Financial Conditions Index (FCI) shows.
• The FCI value printed -0.1 in November compared with -0.6 the previous month. A lower value indicates tighter financial conditions, with a negative value reflecting tighter financial conditions than long-term average (since 2010). An FCI value of within one standard deviation is interpreted as conditions remaining within the comfort zone.
• Global cues have been inducing volatile movements in domestic financial conditions. But after a stressful October, foreign portfolio investor (FPI) flows returned to India and the rupee strengthened in November as the US dollar index eased and crude oil prices fell. Risk appetite of global investors returned as they priced in a likely slowdown in the pace of rate hikes by the US Federal Reserve (Fed) in the coming months.
• However, domestic factors continued to lend tightness. The real interest rate – implied by the repo rate adjusted for consumer price index (CPI) inflation – turned zero after staying negative for three years. Short-term rates in money market rose at a faster clip than longer-term bond yields, with 91-day treasury bill (T-bill) and bank certificate of deposit (CD) recording the sharpest rise in November. Transmission of rate hikes towards bank lending and deposit rates is also picking up.