‘Financial conditions better now’

‘Financial conditions better now’

India’s financial situation has improved from the lows of COVID-19 in April, as per Crisil’s Financial Conditions Index (FCI).

“[The] credit for this is due to the Reserve Bank of India, whose overtures to maintain easier financial conditions — in lockstep with central banks elsewhere — have helped mitigate the large and broad-based economic damage caused by the pandemic,” Crisil said in a report.

“While easy global monetary policies have helped, the RBI’s accommodative stance has helped contain short-run pressures no less,” it said.

However it said, pockets of stress remained as evident in weak bank credit growth, wider spreads on lower-rated corporate bonds, and fundamental pressures due to high government borrowing.

On the necessity to construct the new index, Crisil said CRISIL said, “We believe the financial markets are an economy’s critical plumbing system, through which funds flow to those in need. They become all the more important during economic crises, when incomes and cash flows are disrupted for businesses and households.”

“Today, with the pandemic sparking off one of the biggest recessions, the functioning of the financial sector becomes critical – not only for its role of supporting borrowers, but also for policy implementation,” it added.

To arrive at India’s financial condition the Crisil team looked at movements in key parameters across various financial markets in India, including equity, debt, money and forex markets.

They also took into account financing conditions for the broader economy by including variables such as bank credit growth, lending rates, and money supply.

“Then, we aggregated these variables into an index – the FCI – that can be used to track the state of financial conditions over time. We believe this summary variable can be used to track the state of financial conditions over time,” Crisil said.

This can be used as an input in understanding the state of the economy, the impact of policy and, eventually, for assessing the future path of the economy, it added.

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