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.