Domestic financial conditions tightening, but credit offtake improves

The increasingly tight domestic monetary policy and stronger external headwinds are holding domestic financial conditions in a bear hug. Some market segments are witnessing more stress than others. However, they remain in the comfort zone so far at the overall level, according to CRISIL’s Financial Conditions Index (FCI). In June, the FCI, at a value of -0.5, was close to -0.9 in May, but tighter than 0.9 a year ago. For the June quarter, the FCI stood at -0.4 average, marginally lower than -0.1 in the March quarter.

CRISIL computes the index using key parameters across the equity, money, debt, and foreign exchange markets, coupled with indicators for policy and lending conditions. A lower index value indicates domestic financial conditions are approaching the tighter zone. A value below 0 indicates tighter conditions than the long-term average1, with a value lower than 1 standard deviation indicating significant tightening.

Rate hikes by the Reserve Bank of India and a surge in foreign capital outflows, triggered by tighter monetary policy in the United States Federal Reserve have been tightening the financial conditions. However, credit offtake has continued to improve, with lending rates remaining lower than pre-pandemic levels and the economy’s broadening recovery.