Financial conditions in India are on the mend, affirms Crisil

Our Bureau New Delhi | Updated on October 28, 2020

While index shows easing, there are also pockets of stress

Financial conditions in India have staged a full-throttle recovery from the tightest levels in a decade in April 2020, when the Covid-19 induced lockdown was imposed to stem the spread of pandemic, reveals CRISIL’s new Financial Conditions Index (FCI).

Currently, the financial conditions are the easiest seen in two years, the index showed.

The RBI’s sharp rate cuts and unconventional measures have helped ease financial conditions, according to CRISIL. However, some pockets still have tighter conditions than their long-term averages, particularly credit growth by banks. This could delay transmission of policy easing to the broader economy.

CRISIL expects bank credit growth to slow down to a multi-decadal low of 0-1 per cent this fiscal. The other stress areas are high government borrowing; stress in the corporate bond market ( wider spread on lower rated corporate bonds).

RBI’s actions

Credit for full throttle recovery in financial conditions is due to the Reserve Bank of India (RBI), whose overtures to maintain easier financial conditions – in lockstep with central banks elsewhere – have helped mitigate the large and broad-based economic damage caused by the pandemic, said the CRISIL Research note. While easy global monetary policies have helped, the RBI’s accommodative stance has helped contain short-run pressures no less, it added.

Also read: RBI report: States to re-prioritise revenue spends; sharp cutback in capex on the cards

“The RBI stands ready to undertake further measures as necessary to assure market participants of access to liquidity and easy financing conditions,” RBI governor Shaktikanta Das had said at the October 2020 monetary policy meeting. The central bank has infused liquidity, so far, according to CRISIL Research.

It may be recalled that India’s Financial conditions had been tightening since the IL&FS default in 2018, which triggered a liquidity crisis for non-banking financial companies (NBFCs). This is indicated by the negative values of FCI since then.

The Covid-19 pandemic only magnified this. Consequently, India’s financial conditions were the tightest in a decade in April this year. The only time when FCI dipped to a similar level earlier was in 2013, during the Fed taper tantrum. The FCI has been improving since then, and has turned positive since July.

Also read: Covid impact: Home sales down 43 per cent in first three quarters of 2020

Published on October 28, 2020

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