Financial conditions strained by global macros, lower domestic liquidity
Domestic financial conditions were tighter in August relative to the previous month, CRISIL’s Financial Conditions Index (FCI) shows.
The index value moderated to 0.7 in August after peaking at 1.1 the previous month. A higher index value indicates easier financial conditions, and vice versa. FCI had trended up in the previous four months.
Financial conditions were primarily affected by rising crude oil prices, which hit foreign portfolio investor (FPI) flows to India - the primary driver of easing financial conditions in the previous four months. This hurt the Indian rupee as well, and weakened investor sentiment in the domestic equity and debt markets.
Domestically, reduction in surplus liquidity played spoilsport. The temporary imposition of incremental cash reserve ratio (I-CRR) by the Reserve Bank of India (RBI) reduced systemic liquidity. This led to rising market interest rates, especially in money market and short-term government securities (G-secs).
Nevertheless, the broader economy remains largely unaffected as bank credit growth rose further and lending rates remained stable in August.
The recent adverse turn in macroeconomic indicators, such as crude oil prices, inflation and monsoon deficiency could weigh investor sentiment, if sustained.