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CRISIL’s Financial Conditions Index (FCI) shows India’s overall financial conditions tightened in January compared with December. The FCI fell to 0.5 in January from 0.7 in December.
“Liquidity went into deeper deficit, putting upward pressure on short-term rates. Financial conditions were also affected by foreign portfolio investors (FPIs) turning net-sellers,” Crisil said in a report shared with businessline.
“But as liquidity tightened, the transmission of interest rate hikes improved across lending and deposit rates in January. However, the cumulative rise in most lending and deposit rates remains lower than the Reserve Bank of India’s (RBI’s) 250 basis point hikes since May 2022. Overall bank credit growth has been largely unaffected by the rise in lending and deposit rates so far,” it added.
Incomplete transmission of monetary policy prompted the RBI to keep interest rates unchanged and continue its withdrawal of accommodation stance. “We believe the central bank will be active in liquidity management and regulatory measures to prevent excesses in credit growth. We expect this to moderate gross domestic product (GDP) growth by the next fiscal year. We foresee the RBI cutting rates from June 2024,” Crisil said.
The deficit in domestic systemic liquidity almost doubled in January, compared with December. This led to a net infusion of Rs 2.07 lakh crore (1.0% of NDTL) by the RBI under the liquidity adjustment facility (LAF), compared with Rs 1.14 lakh crore (0.5% of NDTL) in December. Liquidity has been in deficit since September, and the gap has been widening since then.
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The Crisil report said money market rates were under pressure due to the crunch in systemic liquidity. The call money rate has remained above 6.75 per cent — the marginal standing facility and the upper limit of the RBI’s policy corridor — for the past three months, indicating a liquidity crunch in the banking system. Other money market rates saw a sharper rise in January, with the six-month commercial paper (CP) and the six-month certificate of deposit (CD) rates rising sharply on-month by 18 bps and 10 bps, respectively. The CP rate averaged 8.2 per cent, while the CD rate averaged 7.8 per cent.
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