India’s financial conditions broadly resilient to global banking disruptions

• The collapse of small banks in the United States (US) and a near-shutdown of a large global bank in Europe roiled global financial markets in March. But only a few market segments in India were affected, and hence the overall domestic financial conditions tightened only mildly in the month.
• CRISIL’s Financial Conditions Index (FCI) — based on a comprehensive set of parameters across money, debt, equity and foreign exchange markets, policy, and lending conditions — tightened to -0.15 in March from -0.06 the previous month. However, the index value remained within 1 standard deviation of the long-term average, indicating overall conditions were within the comfort zone.
• The global banking turmoil had a brief impact on Indian markets, predominantly affecting equities. Yet, overall foreign portfolio investment (FPI) was net-positive in the month. A sharp fall in global crude oil prices augured well for Indian importers leading to a mild strengthening in the rupee.
• Monetary policy transmission in the economy continued to improve. While domestic interest rates rose at the short end due to tight domestic liquidity, long-term bond yields were range-bound on concerns of a slowdown in economic growth. Bank lending rates rose steadily, but caused only a slight moderation in credit growth.
• Central banks globally seem close to the end of the rate-hike cycle, but risks of financial disruptions remain high. External risks are higher as the rise in interest rates has been sharper in advanced economies. India’s macros remain well positioned for now, but will need to be monitored for any major global spillovers to manoeuvre policy.