Financial conditions find support from FPI inflows in December

• CRISIL’s FCI shows domestic financial conditions were easier in December than November. In December, the index rose to 0.7 from 0.4 previous month.

• The financial conditions were primarily boosted by foreign portfolio investor (FPI) inflows that reached a record high during the month. Domestic equities gained the most from the inflows though flows into the debt also remained steady ahead of India’s inclusion in the JP Morgan Emerging Market Bond Index

• In the money market, there was some pressure on rates as domestic systemic liquidity was deeper in deficit. But in the banking system, lending rates remained stable and bank credit growth stayed strong.

• The RBI may keep liquidity sufficiently in deficit in the remainder of this fiscal to ensure transmission of its past rate hikes to bank lending and deposit rates. This, and regulatory measures to restrict risky credit could somewhat moderate credit growth in the coming months, entailing some de-facto tightening in domestic financial conditions.

• The upcoming budget could also sway market sentiments depending on how the government treads the road to fiscal consolidation and what measures it takes to boost growth.