Drying liquidity and rising crude prices weighed down financial conditions in September. Domestic financial conditions were tighter in September relative to the previous month, CRISIL’s Financial Conditions Index (FCI) shows. The index value moderated to 0.2 in September compared with 0.5 the previous month. A higher index value indicates easier financial conditions and vice versa

“Reducing domestic systemic liquidity exerted pressure on domestic interest rates in September, particularly in the money market. The global environment was unsupportive as well with a sharp rise in crude oil prices and US Treasury yields spurring Foreign Portfolio Investor (FPI) outflows,” Crisil said in its report shared with businessline exclusively.

However, India’s inclusion in the JP Morgan Global Bond Index and easing domestic inflation were positive cues for investor sentiment. But September saw net capital outflows as adverse global factors offset them.

“Markets may not see easing from monetary policy this year as the RBI remains committed to aligning inflation to the 4 per cent target. While we expect the RBI to keep the policy rates unchanged this fiscal, the central bank may use liquidity tools to keep the rates consistent with its stance of withdrawal of accommodation. Open market sales of government securities (G-secs) will rein in liquidity and may put pressure on yields,” it added.

The global environment remains a source of volatility. Crude oil prices face risks from geopolitical tensions even as slowing global demand should work towards cooling prices. The spectre of market accidents looms in major economies that see higher interest rates for a longer period, thereby inducing sporadic episodes of volatility. 


Reacting to extension of supply cuts by major global oil producers, brent crude oil prices rose to $94/barrel average in September from $86.2/bbl in August. A net oil importer, higher oil prices typically impact investor sentiments and in September this phenomenon put pressure on FPI flows, rupee and G-sec yields

In September, the 10-year US Treasury yield rose 21 bps on-month. In addition to safe haven investments, investors in the US bond market are factoring in a prolonged period of tight monetary policy by major central banks. While the US Federal Reserve kept policy rates unchanged in September, it reduced the number of rate cuts expected next year.

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Higher crude oil prices, rising US interest rates turned FPIs net sellers in India for the first time in seven months. September saw $1.7 billion net outflows, compared with $2.2 billion net inflows the previous month. Outflows were primarily from Indian equities (-$1.8 billion in September versus $1.5 billion the previous month) while debt saw net inflows ($0.1 billion vs $0.9 billion) owing to India’s inclusion in the JP Morgan Bond Index

The rupee averaged $83 per US dollar, 0.3 per cent weaker on-month, driven by FPI outflows and stronger dollar – the US dollar index reached a 12-month high in September. However, the rupee did not depreciate to the same extent as the 1.45 per cent increase seen in the US dollar this month. India’s narrower trade deficit on-month along with the RBI’s intervention in the forex market may have controlled the rupee’s depreciation.

Systemic liquidity moved into the deficit zone after being in surplus for six consecutive months. Given the deficit in systemic liquidity, the RBI net-injected ₹ 0.2 lakh crore (0.1 per cent of NDTL1 ) on average in September compared to a net absorption of ₹ 1.2 lakh crore (0.6 per cent of NDTL) in August. The RBI’s temporary imposition of incremental cash reserve ratio (I-CRR) during August-September reduced liquidity.

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Its other interventions such as the open market sale of G-secs and buying rupees in the forex market also drained liquidity. Advanced tax outflows played a significant role in straining liquidity in September. Other macroeconomic factors such as credit growth outpacing deposits and a reduction in government spending in September also played a role

The deficit in liquidity drove money market rates higher. The interbank call money rate rose 10 bps, remaining above the repo rate. The 91-day T-bill rate rose 5 bps, the 6-month CP rate rose 12 bps and the 6-month CD rate remained stable, inching up just 1 bp. Trading volumes in commercial paper (CPs) and certificates of deposit (CDs) declined nearly to 20.85 per cent and about 29.65 per cent, respectively, owing to liquidity crunch in the money market.