Financial conditions look up for second straight month in March

Financial conditions improved for the second consecutive month in March, according to Crisil’s Financial Conditions Index (FCI), which moved up 40 basis points to 1.0 — the highest since August 2023. Higher FCI value indicates better financial conditions.

Foreign capital inflow almost doubled compared to the previous month, benefiting both equity and debt markets. India’s growth and imminent inclusion in two emerging market bond indices this fiscal have been drawing foreign investors.

• Also read: India to see record FPI inflows in FY24 on strong economic growth

Liquidity improved in March, easing the debt- and money-market rates.

While bank credit growth was strong, there was moderation in some segments following the RBI’s regulatory measures in areas such as credit to NBFCs and personal loans. The impact could percolate to the broader economy in the current fiscal.

• Also read: What does RBI’s decision to raise risk weights mean to the borrower?

“On average, financial conditions were easier in fiscal 2024, with FCI increasing to 0.6 in fiscal 2024 from -0.4 previous year. Foreign portfolio investors (FPIs) played a key role in supporting the domestic financial markets. Bank credit growth was higher in fiscal 2024, despite tighter liquidity,” Crisil said

Money-market rates eased on-month due to a narrower deficit in liquidity. The weighted-average call money rate (WACR) eased 12 bps, averaging 6.5 per cent. Rates on other money-market instruments also softened on-month — namely six-month commercial paper by 32 bps to average 8.15 per cent; six-month certificates of deposit by 15 bps to average 7.67 per cent; and 91-day treasury bills by 9 bps to average 6.91 per cent.

Domestic bond yields eased for the fifth consecutive month. The yield on the 10-year G-sec declined marginally to an average of 7.06 per cent from 7.08 per cent. Yields softened at the beginning of the month, after Bloomberg announced it would be including Indian G-secs in its Emerging Markets Local Currency Index from January 2025.

• Also read: India bonds set to be included in the Bloomberg emerging market index

“A narrower deficit in domestic liquidity and FPI inflow into the debt segment contributed to the decline. However, other factors, such as hardening US yields and rising global crude oil prices, capped the decline in domestic yields,” Crisil said.