According to CRISIL’s Financial Conditions Index (FCI), financial conditions in August were tight due to the global macroeconomic situation and declining domestic liquidity.
The index value slowed to 0.7 in August after peaking at 1.1 last month. Higher index values indicate looser financial conditions and vice versa. FCI has been trending upward in the last four months.
“Financial conditions were mainly affected by higher crude oil prices, which hit foreign portfolio investor (FPI) flows to India – the main driver of the easing in financial conditions in the past four months. This also hurt the Indian rupee, and weakened investor sentiment in domestic equity and debt markets. Domestically, the reduction in excess liquidity undermined everything. The temporary implementation of the incremental cash reserve ratio (I-CRR) by the Reserve Bank of India reduced system liquidity. This resulted in Market interest rates increased, particularly in money markets and short-term government securities (G-secs).” Business line
Also read: Crisil’s Financial Condition Index (FCI) more than doubled in June
“Nonetheless, with bank credit growth picking up further and lending rates remaining steady in August, the overall economy was largely unaffected. Recent adverse shifts in macroeconomic indicators such as crude oil prices, inflation and a lack of monsoon could weigh on investors if they persist. mood.”
Brent crude oil prices rose an average of 7.6% in August to $86.2 a barrel, driven by voluntary production cuts by Saudi Arabia and Russia. This weakened investor sentiment, especially that of FPIs, as rising crude oil prices adversely affected India’s current account deficit (CAD), rupee and inflation.
Bond yields have been hit by rising crude oil prices, domestic inflation and liquidity. The 10-year G-sec yield increased 8 basis points month-on-month to an average of 7.19% in August. A sharp rise in crude oil prices has impacted yields amid upside risks to the Indian CAD and inflation. CPI inflation data released in August showed that it rebounded to 7.4%, well above the Reserve Bank of India’s upper limit target of 6%. These developments have reduced expectations for several future rate cuts from the Reserve Bank of India. The reduction in excess liquidity has also led to higher yields, especially at shorter maturities. Compared to the 10-year G-Sec which rose by 8 basis points, the 1-year G-Sec rose by 16 basis points, the 2-year G-Sec rose by 10 basis points, the 3-year G-Sec rose by 11 basis points and the 5-year G-Sec rose by 11 basis points. G-Sec rose 9 basis points. Currently, the yield curve appears to be the flattest it has been since 2018.
