The CII-IBA Financial Conditions Index for the fourth quarter of this fiscal (FY17) fell below the 50 mark owing to banks and financial institutions expecting the overall financial conditions in the economy to deteriorate on account of worsening of external financial linkages and domestic economic activity.

The reading of the Confederation of Indian Industry (CII)-Indian Banks’ Association (IBA) Financial Conditions Index for Q4 of FY17, at 48, signals that majority of the 43 respondents — including public sector banks, private sector banks, foreign banks and non-banking finance companies — have indicated slowdown in the overall economic conditions of the country.

According to a joint CII-IBA statement, considering the significant shift in outlook of financial conditions in the current macro-economic scenario, the impact of the contractionary demand shock triggered by the note ban will eventually radiate from cash-intensive activities to virtually every sector of the economy.

“Since our economy is heavily dependent on cash, demonetisation has hit trade and consumption hard and the move is likely to take a toll on the country’s growth and output during the current fiscal.

“The transition to a cashless economy will eventually improve savings in financial assets which will benefit intermediaries such as banks, NBFCs, micro-finance and digital money operators,” the statement said.

Overall, as per the CII-IBA Round 6 survey, there was a relative decline across all the sub-indices leading to deterioration in the Financial Conditions Index. The sub-indices include Cost of Funds Index, Funding Liquidity Index, External Financial Linkages Index, and Economic Activity Index.

Among the sub-indices, the Economic Activity Index has recorded the lowest level and witnessed maximum decline with expectation of significant deterioration.

However, the Cost of Funds Index and Funding Liquidity Index indicate improvement, reflecting divergence in performance vis-à-vis other sub-indices.

The Economic Activity Index stands at 31.4 in Q4 FY 2016-17. The statement elaborated that “Demonetisation has drastically reduced money supply. As people hold back consumption and hoard cash, the velocity of circulation will fall.

“While some initial data has already started signalling a slowdown, this slowdown in the next two quarters would be temporary and would be followed by a quick and strong period of rebound.”

Majority of the respondents expected deterioration in the real GDP growth for the current quarter and deterioration in non-food bank credit.

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