Deficit liquidity constrains financial conditions in March
 

• Domestic financial conditions, which had been tightening over the last few months, improved marginally in March relative to February, Crisil’s Financial Conditions Index (FCI) 1 showed. The FCI rose to -0.2 in March from -0.5 in February. A higher FCI value implies easier financial conditions and vice versa
• Financial conditions remained within the stated comfort zone of standard deviation from the long period average (measured since April 2020). A negative FCI value indicates tighter financial conditions than the long period average
• The mild improvement in March was primarily because of inflows from foreign portfolio investors (FPIs) and a mild appreciation in the rupee against the dollar. FPI inflows were driven by debt segment due to softer US yields, rate cut expectations and the inclusion of Indian government bonds in global bond indices
• However, domestic liquidity remained tight, leading to rigidity in broader interest rates and keeping the FCI negative. Systemic liquidity was in a deficit for four straight months from December to March. That said, liquidity conditions improved towards the end of March and early April
• In April, the Monetary Policy Committee of the Reserve Bank of India (RBI) cut key policy rates by 25 basis points (bps) and changed its policy stance to accommodative. Financial conditions have been more volatile in April so far as US tariff hikes spurred global market volatility. However, we believe the Reserve Bank of India’s (RBI) rate cuts, along with liquidity easing measures will help support the markets.