Spillover from flighty equities as well

• CRISIL’s Financial Conditions Index (FCI) reflected a tighter environment in May ahead of election outcome. The FCI value came lower at 0.2 during the month compared with 0.5 in April and 0.4 in May last year.¹
• The FCI was primarily influenced by the equity market, which saw large swings as general elections progressed and after exit poll outcomes were known. Foreign portfolio investors (FPIs) turned net sellers amid elections uncertainty. Tightening liquidity also put mild pressure on money market rates.
• However, conditions remained benign in the bond and currency markets, supported by external cues such as easing crude oil prices and United States (US) Treasury yields. In contrast to equities, the domestic bond market continued to attract FPI flows as inclusion of the Indian bonds in the global bond indices is imminent.
• Financial conditions remained in the comfort zone, as indicated by the FCI value that stayed within 1 standard deviation of long-term average (within the dotted lines in the chart below). Liquidity conditions remained benign relative to pre-pandemic decade. In the broader economy, bank credit was stronger than pre-pandemic average.

¹ A higher FCI value indicates easier financial conditions, and vice versa.