Domestic financial conditions in the comfort zone despite FPI outflows

• Short-term capital flows to India from foreign portfolio investors (FPIs) have been highly volatile. After record-high inflows in September, October logged the highest post-pandemic outflows. Yet, this did not significantly drag India’s financial conditions, CRISIL’s Financial Conditions Index (FCI) shows
• CRISIL’s FCI - which is a combination of parameters from India’s major market segments along with policy and lending conditions¹ – stood at 0.1 in October, compared with 1.2 in the previous month. This meant financial conditions were tighter in October than in the previous month. However, the FCI value remained positive, implying easier conditions than the long-term average
• FPI outflows primarily hit the equity markets. The pressure on domestic interest rates was limited, as it was offset by easier domestic monetary conditions. The Reserve Bank of India (RBI) changed its stance to ‘neutral’ in October, while systemic liquidity conditions improved. Additionally, stable crude prices supported the Indian financial markets. The rupee depreciated at a moderate pace during the month
• That said, the lagged impact of the RBI’s past rate hikes is gradually being felt in the broader economy. Bank credit growth has been slowing in the past three months, including for personal loans. This is likely to impact consumption, especially in urban areas

¹ CRISIL’s FCI is constructed 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