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Financial conditions in the Indian economy have improved owing to expectations of a reduction in cost of funds for banks and financial institutions, a Confederation of Indian Industry survey said.
There is also an expectation that banks and financial institutions will have a strong liquidity position, better external financial linkages and an uptick in economic activity, the CII-IBA Financial Conditions Index stated.
The index stood at 70.3 for the third quarter of fiscal 2015-16 against 67.8 in the previous quarter. The report comes ahead of the Reserve Bank of India’s fifth bi-monthly policy review for 2015-16.
“The scale of improvement in the financial conditions index for the current quarter will provide necessary comfort to the RBI in continuing and further extending the accommodative monetary policy stance for supporting higher economic growth,” said Chandrajit Banerjee, Director General, CII.
“The directional change in performance of the financial conditions index augurs well for the Indian economy. Sustainable improvement in the financial conditions is a key imperative for maintaining financial stability and steady economic growth,” said Ashwini Kumar, Chairman of Indian Banks’ Association and Chairman & Managing Director of Dena Bank.
The CII–IBA Financial Conditions Index is based on a survey of major banks and financial institutions. The index shows that even though there was a relative decline in the funding liquidity index from the previous quarter, it was at the highest level among the other sub-indices of cost of funds index, external financial linkages index and economic activity index.
External Financial Linkages Index reached 68.4 in the third quarter of fiscal 2015-16 from 59 in the previous quarter.
The improvement reflects the strong degree of optimism in the Indian financial sector to withstand any potential shocks emerging from the US Fed interest rate hike anticipated in December 2015, CII said in a statement.
The Cost of Funds Index improved only marginally in the third quarter. However, majority of the banks and financial institutions surveyed to form the index expect the overall cost of funds to reduce in the current quarter.
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