Financial conditions eased in August relative to previous month

Despite the Reserve Bank of India (RBI) hiking the repo rate by 50 basis points (bps) in August as well, financial conditions have remained within the comfort zone, CRISIL’s Financial Conditions Index (FCI) shows. Easing global headwinds in the form of falling crude oil prices, weaker dollar, and higher foreign portfolio investor (FPI) inflows, supported the domestic markets.

The FCI – based on 15 parameters across money, debt, equity and foreign exchange markets, policy and lending conditions – came at 0.5 in August, compared with -0.7 previous month. A higher value indicates easier financial conditions, with a value above zero indicating easier conditions compared with the long-term average.¹ The 3-month moving average value remained negative at -0.3 in August.

Global factors such as falling crude oil prices and expectations of less-aggressive United States (US) Federal Reserve actions in the wake of a softer US inflation print for August, played a key role in boosting domestic markets in August. However, global markets remain volatile and could turn adverse as the Federal continues to hike rates aggressively. Meanwhile, the RBI has been steady on rate hikes and withdrawing excess liquidity, which will impart a mild tightening bias to financial conditions.

¹ Average since April 2010