Money & Banking

CII-IBA financial conditions index declines to 60.5 in Q4

Our Bureau Mumbai | Updated on February 13, 2020 Published on February 13, 2020

Sub-indices such as cost of funds index and external financial linkages index fall

The CII-IBA Financial Conditions Index (FCI) for Q4 (January to March) of FY20 has declined to 60.5 from 68.9 in Q3 (October to December), mainly due to the fall in two sub-indices related to cost of funds and external financial linkages.

An FCI reading above 50 indicates largely optimistic expectation of financial conditions. A total of 26 entities (10 public sector banks, six private sector banks, two foreign banks, one co-operative bank, and seven leading non-banking finance companies) participated in the Financial Conditions Expectation Survey, which was undertaken between December 2019 and January 2020.

The FCI is down in Q4 vis-a-vis Q3 mainly due to the decline in sub-indices such as cost of funds index (down to 52.4 in the reporting quarter from 77.8 in the preceding quarter) and external financial linkages index (down to 59.6 from 71.0).

The other two sub-indices within the FCI, however, nudged up – funding liquidity index to 74.0 from 72.7 and economic activity index to 55.8 from 54.0.

Sunil Mehta, CEO, Indian Banks’ Association (IBA), observed that with the Budget providing a fillip to household consumption and infrastructure spending, it is quite reasonable to expect improvement in market sentiments.

“Highest reading of funding liquidity index indicates expectation of adequate liquidity in the system, which is conducive for the business of banks. Lowering of the lending rate by banks in consonance with the repo rate reduction will help in reducing the cost of funds for borrowers and credit flow to the productive sectors of the economy,” said Mehta.

According to the CII-IBA report, the interest rate range of one-year term deposit has come down from 7.50 per cent in January 2019 to 6.40 per cent in January 2020. As a result, banks were able to reduce the marginal cost of funds-based lending rate (MCLR).

Liquidity position

The report expects MCLR to come down, showcasing an overall feeling of optimism in the cost of funds index. The funding liquidity index in the current quarter recorded a value of 74, which has marginally improved in comparison to the previous quarter (74.0).

This index depicts the likely liquidity position in the market. The external financial linkages index has recorded a value of 59.6, which has dropped significantly in comparison to the previous quarter. However, the value being over 50 represents optimistic expectations, according to the survey.

Since the investment potential in the country is quite strong, a clear policy will help in increasing the foreign exchange reserves, said the survey participants.

According to the survey, the expectation on the economic activity index has marginally improved in comparison to the previous quarter, registering a value of 55.8. This value indicates optimism, but not exuberance in the expectations of banks and financial institutions, it added.

GDP growth

The survey indicates that 61.5 per cent of the respondents expect GDP growth to increase in the current quarter, with only 7.7 per cent expecting it to remain the same, while the remaining 30.8 per cent respondents believe that GDP growth is likely to decrease.

In terms of inflation, only 15.4 per cent of the respondents expect inflation to decrease, while 84.6 per cent expect a rise in inflation.

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Published on February 13, 2020
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