Global and domestic factors tighten India’s financial conditions

• Domestic financial conditions tightened in October relative to the previous month. Though conditions were mildly tight compared with the long-term average, as indicated by Crisil’s Financial Conditions Index (FCI), they remained in the comfort zone¹.
• The FCI value printed 0.5 standard deviation (SD) tighter than the long-term average (since 2010), compared with the September reading of 0.1 SD tighter than the average².
• Domestic monetary tightening gained momentum after the Reserve Bank of India (RBI) hiked policy rates by 50 basis points (bps) at September-end. Liquidity went into deficit by October-end, driven by surging credit demand, rising currency in circulation, and foreign portfolio investor (FPI) outflows. Money market rates and bond yields rose, while banks hiked lending rates at a greater pace sequentially. Yet, bank lending rates remained lower than the pre-pandemic 5-year average, supporting the continued surge in credit growth.
• Globally, financial conditions remained tight with the US dollar index strengthening further, Treasury yields reaching a 14-year high, and equities sinking lower. FPI outflows and elevated trade deficit ramped up pressure on the rupee.
• While global factors drove the initial tightening in India’s financial conditions, domestic factors have begun contributing more to the tightening of late.

¹ Value < 1 SD indicates financial conditions are within the comfort zone.
² A lower value indicates tighter financial conditions, and vice versa.