The Confederation of Indian Industry - Indian Banks’ Association Financial Conditions Index for Q1 (April-June) FY 2018-19 has fallen to 51.2 vis-a-vis the preceding quarter’s reading of 53.2.

The overall decline in the CII-IBA financial conditions index has occurred because of a fall in the External Financial Linkages Index and Funding Liquidity Index, according to their joint statement.

“However, it (Financial Conditions Index for Q1FY 2018-19) is still above the benchmark index….Though the overall index reading is closer to the optimism tag, there has been improvement in the expectation on Cost of Funds Index and Economic Activity Index in comparison to the previous quarter,” it said.

Ten public sector banks, seven private sector banks, three foreign banks, one urban co-operative bank and eight non-banking finance companies participated in the Financial Conditions Index Survey.

External Financial Linkages Index

This index declined to 42.7 from 67.2 in the previous quarter. According to the survey, approximately 52 per cent of the respondents expects the foreign exchange reserves to increase, however, approximately 38 per cent think otherwise.

“Since the rupee is weakening against the dollar, it has its impact on the reserves as well,” the Survey said.

In terms of net capital inflows, approximately 31 per cent of the respondents expect that the investment by FIIs will increase, while 44.8 per cent of the respondents feel that the investment by FIIs will deteriorate.

The survey observed that FII flows would be quite likely to remain volatile as emerging markets compete for foreign flows and the country with stable macro-economic fundamentals would be an attractive destination.

In terms of nominal exchange rate, approximately 21 per cent of the respondents expect the exchange rate to depreciate and 59 per cent of the respondents expect the exchange rate to appreciate.

According to the survey, due to rising crude oil prices, and India being a major importer of oil, the rupee has seen weakness during April. Since the foreign exchange reserves are still strong, it would act as a balancing factor.

Approximately 21 per cent of the respondents expect the mobilisation through ADRs, GDRs, ECBs and FCCBs to increase, but 41.4 per cent of the respondents think otherwise.

Funding Liquidity Index

This index declined to 58.2 from 60.3 in the preceding quarter. This index depicts the likely liquidity position in the market.

Approximately 45 per cent respondents believe that the borrowing by banks through LAF (liquidity adjustment facility) window might decrease whereas around 38 per cent respondents believe that borrowing by banks through LAF window might increase.

Approximately 45 per cent of the respondents believe that the mobilisation from the money market would increase, whereas 31 per cent respondents believe that there will be a fall in the mobilisation of funds from money market instruments.

About 44.8 per cent of the respondents are optimistic about the increase in issuance in the bond market but 24.1 per cent of the respondents believe that issuance in the corporate bond market will decrease in the first quarter.

Approximately 55 per cent of the respondents believe that the mobilisation from the equity market would increase, whereas 31 per cent believe that the mobilisation from equity market will decrease.

Cost of Funds and Economic Activity index

Though the Cost of Funds Index has shown an improvement to 38.4 over the preceding quarter (22.8), the sub-index reading is lying below 50, indicating apprehension on hardening of interest rates going forward.

Economic activity Index has shown improvement to 65.5 over the previous quarter (62.5), which reinstates that there is considerable potential for the economy to perform better in the coming quarters. This is also substantiated by the IMF’s recent projection of 7.4 per cent growth for the Indian economy.

comment COMMENT NOW