With the suspense over new government formation ending and the monetary policy landscape unchanged, domestic financial conditions, as measured by CRISIL’s Financial Conditions Index (FCI), improved in June after weakening over the past two months.

CRISIL FCI, a summary indicator that captures key parameters across India’s major market segments, rose to 0.7 in June from 0.2 previous month.

This happened as foreign portfolio investors (FPIs) net-invested after two months of outflows, coinciding with a sharp rise in equity market indices. Investor optimism revived following signs of stability at the Centre and no indications of major changes in the fiscal policy. Additionally, improving domestic liquidity conditions and global cues supported the markets. Financial outlook is healthy despite tight monetary conditions, Crisil said in its latest FCI report shared exclusively with businessline.

Factors which supported financial conditions in June 

Monetary conditions continue to be tighter than pre-pandemic levels. The repo rate is higher than the five-year average preceding the pandemic and liquidity conditions are tighter.

Globally, policy rates in major advanced economies remain at decadal highs, while crude oil prices remain elevated. Yet, major domestic market parameters, particularly equity and debt markets are performing better than prepandemic trend. FPI flows are higher, driven by improving Indian macro fundamentals, and its inclusion in global bond indices. Credit growth is higher than pre-pandemic average despite higher interest rates, the report said.

“The country’s economic resilience was corroborated by the Reserve Bank of India’s (RBI) June Financial Stability Report, which indicated strengthening of balance sheets of domestic financial institutions. However, the central bank remains wary of the frequency of shocks post pandemic,” Crisil said.

The liquidity deficit decreased in June compared with the previous month. The RBI’s net injection of ₹0.55 lakh crore (0.2 per cent of net demand and time liabilities, or NDTL) during the month was significantly lower than ₹1.38 lakh crore (0.6 per cent of NDTL) in May. Credit growth slowed in June, while deposit growth was unchanged (12.2 per cent vs 12.1 per cent), which helped ease liquidity conditions, Crisil said.