Domestic financial conditions improved in June relative to the previous month, according to Crisil’s Financial Conditions Index (FCI).

The index value was 0.9 in June, compared with 0.4 the previous month. A higher value of the index indicates easier financial conditions, and vice versa.

The improvement was driven by foreign portfolio investor (FPI) inflows that reached a 10-month high in June, led by strong domestic macros. This benefitted India’s equity and debt markets, and caused mild appreciation of the rupee,” stated the report shared exclusively with businessline.

From the domestic side, bank credit growth was the strongest segment of financial conditions. While bank lending rates have stabilised near pre-pandemic five-year average, credit growth continued to rise, signalling robust demand conditions in the Indian economy, as well as banks’ improved appetite towards retail borrowers. •

For the first quarter, overall, financial conditions were better, as indicated by FCI averaging 0.5 in April-June 2023 compared with -0.1 the previous quarter, and -0.6 in April-June 2022.

“Halting rate hikes by Reserve Bank of India (RBI) and the United States (US) Federal Reserve (Fed) led the easing in conditions while improving domestic macros strengthened India’s case for investors. However, this may not be the end of rate hikes, especially for advanced economies like US, European Union (EU), and United Kingdom. In India too, upside risks on inflation could keep RBI on the edge. These factors could induce some volatility in financial conditions in the next few months,” Crisil said.

Favourable factors

What led to easier financial conditions in June?

Stronger FPI inflows: FPI inflows increased to $6.8 billion (net) in June — the highest since August 2022 — from $5.9 billion the previous month. Most of the flows went to equity ($5.7 billion in June versus $5.3 billion previous month), but debt saw a sharp rise ($1.1 billion vs $0.4 billion).

India’s appeal as an attractive investment destination was reinforced with positive incoming data on major macroeconomic parameters. In June, investors cheered the stronger-than-expected growth in gross domestic product (GDP) — at 6.1 per cent — in the fourth quarter of fiscal 2023 from 4.5 per cent previous quarter. Inflation slid to a 26-month low of 4.3 per cent in May. External cues supported the risk appetite for the month. The US Fed paused on rate hike in June. Falling crude oil prices ($74.9 per barrel in June vs $75.7 previous month) augured well for net importers like India.

Rising equities: Benchmark equities scaled record highs in June, supported by FPI inflows, encouraging domestic macroeconomic data and RBI’s status quo on rates. S&P BSE Sensex gained 2 per cent on average in June, and market volatility reduced in the month (as indicated by NSE’s India VIX index).

Stabilising rupee: Rupee averaged 82.2 per US dollar in June, 0.1 per cent stronger on-month. Besides higher FPI inflows, falling trade deficit and weaker dollar contributed to stronger rupee in June.

Improving domestic liquidity: Overall surplus liquidity was higher in June, as indicated by the RBI net absorbing ₹1.3 lakh crore (0.6 per cent of NDTL2 ) average in June compared with ₹80,000 crore (0.4 per cent of NDTL) previous month. The ongoing return of ₹2,000-denomination notes, coupled with rising government spending and FPI inflows helped raise banking liquidity. However, liquidity seemed to be unevenly spread across the banking sector. On one side, some banks parked funds under variable rate reverse repo window, and on the other some resorted to accessing funds under marginal standing facility.

Stable market interest rates: Money market rates eased mildly in June under improving liquidity conditions. The interbank call money rate eased 7 basis points (bps) on-month, 91-day Treasury Bill (T-Bill) yield 7 bps, and 6-month commercial paper (CP) 10 bps average in June. Domestic bond yields were supported by positive FPI inflows, along with easing inflation and pause on rates by RBI and the Fed. However, Fed’s dot plot projections indicated two more rate hikes this year, which capped the gains. Overall, yield on the benchmark 10-year government security (G-Sec) averaged 7.03 per cent in June, only 2 basis points up on-month.