Flighty global markets tighten domestic financial conditions

• Domestic financial conditions were tighter in August relative to July, CRISIL’s Financial Conditions Index (FCI) shows. The gauge, which captures India’s major market segments¹, moderated to 0.5 in August from 0.8 on-month
• Global investors are readjusting to diverging economic trajectories and monetary policies of major economies. While the Federal Reserve (Fed) began cutting rates in September, Bank of Japan (BoJ) hiked its rate at July-end, which triggered the unwinding of ‘yen carry trade’ that disrupted global financial flows in August
• Investors factored in signs of weakness in two biggest economies—the US and China—which led to a decline in crude prices, weaker US dollar, and easing US bond yields
• These wide-ranging global developments helped some of the segments of India’s markets and hit the others. Foreign Portfolio Investors (FPIs) inflows reduced in August, hitting equity market the most, while the rupee depreciated mildly. However, the bond market, which benefitted from falling crude prices and US yields, and the continuing effects of India’s inclusion in the JP Morgan Emerging Market Bond Index, handled the global turbulence better
• Domestic factors remained supportive as systemic liquidity conditions improved and bank credit growth remained strong. Easing domestic inflation, coupled with the Fed rate cut, is further creating conditions for the Reserve Bank of India (RBI) to begin its easing cycle in the second half of this fiscal

¹ CRISIL’s FCI is determined based on 15 parameters across money, debt, equity, and foreign exchange markets, along with monetary policy and bank lending conditions. Higher FCI value means easier financial conditions and vice versa