CRISIL’s Financial Conditions Index slips back into ‘easy zone’ in April

Geopolitical developments, and actions by the Reserve Bank of India (RBI) and other major global central banks have made for volatile domestic financial conditions in India this year. CRISIL’s Financial Conditions Index (FCI)¹ entered the ‘tight zone’ in March, as the sudden outbreak of the Russia-Ukraine war triggered massive capital outflows and a surge in global oil prices, causing a debilitating impact on the rupee. In April though, some of these global headwinds stabilised.

On the domestic front, some tightness of interest rates was seen post RBI policy in April, as it announced moves towards further exit from its easy monetary policy, while keeping benchmark repo rate unchanged. This led to a sharp rise in money market and government security (G-sec) yields, transmitting to an increase in lending rates by some banks. Yet, real policy rate stayed negative (as inflation remains higher than repo rate), while bank lending rates remained at decadal lows. This, coupled with improving economic activity, contributed to a recovery in credit growth.

So far, it seems rising interest rates have not constrained supply of credit to the broader economy. Even as RBI is reducing excess liquidity in the system, it remains adequate to support credit growth.

¹ CRISIL’s FCI is a monthly tracker based on 15 key parameters across equity, debt, money and forex markets, along with policy and lending conditions. It is constructed to have an average value of zero and a standard deviation of one over the period starting from 2010. Positive values of the index are associated with easier-than-average financial conditions, while negative values are associated with tighter-than-average financial conditions.