Foreign capital inflows help ease financial conditions in December
- Domestic financial conditions improved marginally on-month in December. The CRISIL Financial Conditions Index (FCI), an indicator capturing parameters from India’s major financial market segments,1 rose to 0.5 from 0.4 in November2
- Foreign portfolio investors (FPI) returned to Indian markets in the first half of the month as US treasury yields cooled. This buoyed equities and supported softer domestic yields. Falling crude prices augured well for inflows into oil importing economies such as India. But a rapidly strengthening dollar, put pressure on the rupee and it high a fresh low against the dollar.
- Domestic liquidity tightened despite the Reserve Bank of India (RBI) cutting the cash reserve ratio (CRR) on the back of increased currency demand during the festival season and tax outflows. Tighter liquidity pushed up money market rates. An uptick in bank credit growth provided some support to domestic liquidity
- On average, financial conditions were tighter in the December quarter relative to the September quarter, with the FCI averaging 0.2 in October-December against 0.7 in July-September. The strengthening of the United States (US) dollar, particularly after President Donald Trump’s election, put pressure on domestic financial conditions via waning capital flows in October and November
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
2 A higher value indicates easier financial conditions and vice versa