Financial conditions improve in June with strengthening foreign inflows

Domestic financial conditions improved in June relative to the previous month, CRISIL’s Financial Conditions Index (FCI) shows¹. The index value was 0.9 in June compared with 0.4 the previous month. A higher value of the index indicates easier financial conditons, and vice versa.

• The improvement was driven by foreign portfolio investor (FPI) inflows that reached a 10-month high in June, led by strong domestic macros. This benefitted India’s equity and debt markets, and caused mild appreciation of the rupee.
  
• From the domestic side, bank credit growth was the strongest segment of financial conditions. While bank lending rates have stabilised near pre-pandemic five-year average, credit growth continued to rise, signalling robust demand conditions in the Indian economy, as well as banks’ improved appetite towards retail borrowers.
  
• For the first quarter overall, financial conditions were better, as indicated by FCI averaging 0.5 in April-June 2023 compared with -0.1 previous quarter, and -0.6 in April-June 2022. Halting rate hikes by Reserve Bank of India (RBI) and the United States (US) Federal Reserve (Fed) led the easing in conditions, while improving domestic macros strengthened India’s case for investors.
  
• However, this may not be the end of rate hikes, especially for advanced economies like US, European Union (EU), and United Kingdom. In India too, upside risks on inflation could keep RBI on the edge. These factors could induce some volatility in financial conditions in the next few months.
  

¹ CRISIL’s FCI is a monthly tracker that combines 15 key parameters across equity, debt, money and forex markets along with policy and lending conditions.