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Financial Conditions Improving

Monday, November 30, 2015
By Dominic Rebello

“It is heartening to note that the financial conditions in the Indian economy are improving in tandem with the overall macroeconomic outlook. The scale of improvement in the financial conditions index for the current quarter will provide the necessary comfort to the RBI in continuing and further extending the accommodative monetary policy stance for supporting higher economic growth” said Chandrajit Banerjee, Director General, CII while releasing CII – IBA Financial Conditions Index numbers for the third quarter of 2015-16.

Ahead of the Reserve Bank of India’s fifth bi-monthly policy review for 2015-16, the CII – IBA Financial Conditions Index at 70.3 for Q3 FY 2015-16 shows healthy improvement in the overall financial conditions in the Indian economy vis-à-vis the previous quarter (67.8) owing to expectations of leading banks and financial institutions of reduction in cost of funds, strong liquidity position, better external financial linkages and an uptick in economic activity.

The reading of the CII – IBA Financial Conditions Index for Q3 FY 2015-16 at 70.3 was significantly above the 50 mark implying a strong majority of the respondent banks and financial institutions reporting improvement or no change in the overall financial conditions as against deterioration vis-à-vis the previous quarter.

Commenting on the performance of the Index for the current quarter, Ashwini Kumar, Chairman, IBA and Chairman & Managing Director, Dena Bank said “The directional change in the performance of the financial conditions index augurs well for the Indian economy. Sustainable improvement in the financial conditions is a key imperative for maintaining financial stability and steady economic growth”.

According to the CII – IBA Financial Conditions Index for Q3 FY 2015-16, there was a significant rise in the expectation of banks and financial institutions for an improvement in the overall financial conditions index owing to an increase in the external financial linkages index, the cost of funds index and the economic activity index on a quarter-on-quarter basis. Also, even as there was a relative decline in the funding liquidity index from the previous quarter, it was recorded at the highest level among the four sub-indices.

Among the sub-indices, the External Financial Linkages Index witnessed the maximum improvement to reach at 68.4 in Q3 FY 2015-16 from 59.0 in the previous quarter. This reflects the strong degree of optimism in the Indian financial sector to withstand any potential shocks emerging from the US Fed interest rate hike anticipated in December 2015.

The Cost of Funds Index at 69.4 witnessed moderate improvement from 68.6 in the previous quarter. With the RBI reducing the repo rate by 50 basis points just before the beginning of the current quarter, majority of the respondent banks and financial institutions expects the overall cost of funds to decline in the current quarter.

The Funding Liquidity Index was recorded at 74.7, a modest decline from the previous quarter (75.3). Though the number is significantly higher than the 50 mark, signaling a strong expectation of improvement in the funding liquidity in the Indian financial system, the decline on a quarter on quarter basis may not be favourable for the overall financial conditions going forward.

The Economic Activity Index with a standing at 68.8 witnessed a moderate increase from 68.3 in the previous quarter. The overall expectation of improvement in the economic activity augurs well for underpinning the financial conditions in the prevailing macroeconomic scenario.
 

Performance of CII – IBA Financial Conditions Index for Q3 FY 2015-16 vs Q2 FY 2015-16

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