The transmission of the Reserve Bank of India’s rate hikes is almost complete in the housing sector but not fully done in other sectors, including auto loans and deposit rates. Therefore, the RBI may keep liquidity sufficiently in deficit in the remainder of this fiscal to ensure transmission of its past rate hikes to bank lending and deposit rates, according to CRISIL’s Financial Conditions Index report for December.

“While the repo rate has risen 250 bps since April 2022, the auto loan rate has risen 151 bps, the six-month MCLR is 163 bps, and deposit rates are 170 bps. However, in the housing loan segment, the transmission is almost complete as the rate has risen 231 bps during the period. The RBI may keep liquidity sufficiently in deficit for the remainder of this fiscal to ensure the transmission of its past rate hikes to bank lending and deposit rates. This and regulatory measures to restrict risky credit could somewhat moderate credit growth in the coming months, entailing some de-facto tightening in domestic financial conditions,” Crisil said in its report shared exclusively with businessline.

CRISIL’s FCI shows domestic financial conditions were easier

Overall, CRISIL’s FCI shows domestic financial conditions were easier in December than November. In December, the index rose to 0.7 from 0.4 the previous month. The financial conditions were primarily boosted by foreign portfolio investor (FPI) inflows that reached a record high during the month. Domestic equities gained the most from the inflows, though flows into debt also remained steady ahead of India’s inclusion in the JP Morgan Emerging Market Bond Index.

Yield on the benchmark 10-year G-sec eased for the second straight month to 7.21 per cent on average, up from 7.27 per cent in November and 7.33 per cent in October. The decline in bond yields over the last two months can be attributed to a softening of US Treasury yields, strong foreign investment into the Indian debt market, and a decline in crude oil prices. On the other hand, the widening deficit in domestic liquidity limited the decline in yields.

“Global market developments remain a source of volatility. While the US Fed tilting towards rate cuts provided relief to markets in December, disruptions in the Red Sea trade route in January have revived tensions in some market segments. Especially, crude oil prices have begun rising around mid-January. Any increase in volatility could affect short-term capital flows into the Indian markets,” Crisil said.

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