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The Indian economy is moving in the right direction with signs of firm improvement in the prevailing financial conditions in the April-June 2015 period, according to the maiden Confederation of Indian Industry (CII) and Indian Banks’ Association (IBA) quarterly Financial Conditions Index (FCI).
CII and IBA have come to the conclusion that banks and financial institutions are seeing significant improvement in the cost of credit and funding liquidity with external financial linkages and economic activity witnessing relatively moderate improvement.
The FCI is made up of four sub-indices — cost of funds index, funding liquidity index, external financial linkages index, and economic activity index.
A joint CII-IBA statement said the FCI, with a reading of 74.1, exhibits a positive outlook with signs of firm improvement in the prevailing financial conditions of the Indian economy in the first quarter of FY16.
The improvement is expected on account of sound performance on cost of funds index and funding liquidity index. Further, the external financial linkages index and economic activity index also indicate improvement, albeit at a relatively moderate level.
Among the sub-indices, the cost of funds index with a value of 83 recorded the highest value across the four sub-indices as majority of the respondent banks and financial institutions expect both short-term as well as long-term cost of funds to ease further.
The funding liquidity index reading came in at 78.8 as respondents expect the central bank to continue to manage liquidity effectively through the liquidity adjustment facility operations as well as the term repos and reverse repos window.
The external financial linkages index was recorded at 65.4, lowest among the four sub-indices. However, the silver lining was the expectation of the majority of the respondents of no threat from the anticipated hike by the US Fed in interest rate in the near term.
The economic activity index with a standing of 69.1 showed mixed performance across indicators. While improvement in the real GDP growth and pick-up in non-food bank credit is anticipated, the situation on the inflation (consumer price index) and asset prices (stock and housing markets) fronts are expected to witness no major change.
In terms of categories of respondents, foreign banks were the most optimistic about improvement in the financial conditions in the reporting quarter, followed by private sector banks, co-operative banks and public sector banks.
Non-banking finance companies were the most conservative in their expectation of improvement in the financial conditions.
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