Financial conditions tighten on rising FPI outflows and G-Sec yields

• CRISIL’s Financial Conditions Index (FCI) shows domestic financial conditions to have tightened further in October from September
  
• The index value reduced to 0.1 from 0.3. The average for the first half of fiscal 2024 was 0.6. A lower index value indicates tightening financial conditions. That said, the positive FCI value implies that conditions remained easier when compared with the long-term average period (since April 2010)
  
• Two factors have a larger role to play behind India’s tightening financial conditions – foreign portfolio investor (FPI) outflows for two months in a row (especially from the equity market), and a sharp rise in government security (G-Sec) yields
  
• Globally, escalating tensions in the Middle East hit Indian markets through crude price hikes, while US Treasury yields touching 5% for the first time post 2007 led to FPI outflows
• Markets may not see monetary policy easing this year as RBI remains committed to aligning inflation to its 4% target. While RBI is expected to keep policy rates unchanged, it may use liquidity tools to keep rates consistent with its withdrawal of accommodation stance. Its recent move to increase risk weights for consumer loans could slow credit growth
• While geopolitical risks remain high and act as a potential source of volatility, higher-for-longer interest rates in advanced economies could sustain pressure on FPI flows