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The CII-IBA Financial Conditions Index for Q1 (April-June) FY20 has recorded yet another rise to the above-50-mark for the third time in a row, owing to expectation of improvement in the overall condition of the economy.
The Financial Conditions Index for Q1 FY20 has come in at a robust 68.1, against 62.9 in the preceding quarter. The index is up on account of most of the components — External Financial Linkages, Funding Liquidity Index and Cost of Funds Index — barring the Economic Activity Index. Going by the significance of index levels, a reading above 50 is considered ‘largely optimistic’.
The latest index figure is based on Round 15 of the Financial Conditions Expectation Survey undertaken in April, in which 23 entities participated, including seven public sector banks, six private sector banks, two foreign banks, one co-operative bank, and seven non-banking finance companies.
According to the joint survey by the Confederation of Indian Industry (CII) and the Indian Banks’ Association (IBA), the Cost of Funds Index was recorded at 67.4 in Q1 FY20, against 58.5 in the preceding quarter.
The majority of the respondent banks and financial institutions expect short-term interest rates (the interbank call rate and three-month bank certificate of deposit rate), long-term interest rates, yield on 10-year Government of India bonds and conditions of marginal cost of funds-based lending rate (MCLR) to come down, indicating improvement in the Cost of Funds Index.
Funding liquidity
The Funding Liquidity Index in the current quarter recorded a value of 71.2, marking a significant improvement over the preceding quarter’s 61.2.
This index depicts the likely liquidity position in the market. The improvement is primarily due to the improved mobilisation in the money market through commercial papers/certificate of deposits, issuance in the corporate bond market and mobilisation in the equity market.
External financial linkages
The External Financial Linkages Index has recorded a value of 81, which is significantly higher compared to the preceding quarter’s 67.4. Out of all the factors, this index has achieved the highest score across all indicators.
According to the survey, 87 per cent of the respondents expect mobilisation through American Depository Receipts, Global Depository Receipts, External Commercial Borrowings and Foreign Currency Convertible Bonds to increase; only 4.3 per cent of the respondents think otherwise. The remaining 8.7 per cent of the respondents expect the mobilisation to remain the same.
Economic activity
The survey revealed expectations on the Economic Activity Index have seen a relatively significant decline to 52.7, compared to the preceding quarter’s 64.7. This reading, however, still indicates optimism. The value of the index is supported by the moderate optimism over GDP growth, asset prices and non-food bank credit pick-up.
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