CRISIL’s Financial Conditions Index (FCI) shows domestic financial conditions to have tightened further in October from September. The index value reduced to 0.1 from 0.3. The average for the first half of fiscal 2024 was 0.6. A lower index value indicates tightening financial conditions.

That said, the positive FCI value implies that conditions remained easier when compared with the long-term average period (since April 2010).

Two factors have a larger role to play behind India’s tightening financial conditions – foreign portfolio investor (FPI) outflows for two months in a row (especially from the equity market), and a sharp rise in government security (G-Sec) yields

“Globally, escalating tensions in the Middle East hit Indian markets through crude price hikes, while US Treasury yields touching 5% for the first time post-2007 led to FPI outflows. Markets may not see monetary policy easing this year as RBI remains committed to aligning inflation to its 4 per cent target. While RBI is expected to keep policy rates unchanged, it may use liquidity tools to keep rates consistent with its withdrawal of accommodation stance. Its recent move to increase risk weights for consumer loans could slow credit growth. While geopolitical risks remain high and act as a potential source of volatility, higher-for-longer interest rates in advanced economies could sustain pressure on FPI flows,” Crisil said in its report shared exclusively with businessline.

Bond yields rose in October, with the benchmark 10-year G-sec rising 16 basis points (bps) on-month to 7.33 per cent average in October. RBI’s open market sales drove a rise in G-sec yields. While RBI kept policy rates unchanged in October’s monetary policy, it surprised the market by indicating open market sales of G-Secs to drain excess liquidity. Open market sales subsequently increased to ₹9,915 crore in October from ₹8,385 crore the previous month. External factors such as rising US Treasury yields and crude price hikes also added pressure. Even so, FPI inflows to the debt market increased, capping a further rise in yields.

The deficit in systemic liquidity increased slightly in October from the previous month, as evident from RBI net injecting Rs 0.5 lakh crore (0.2 per cent of NDTL1 ) under the liquidity adjustment facility (LAF) compared with ₹0.2 lakh crore in September (0.1% of NDTL). RBI’s open market sales of G-Secs, credit growth staying higher than deposit growth, as well as lower government spending, contributed to lower liquidity.