Thu Sep 19 05:37:54 UTC 2024: ## India’s Financial Conditions Tighten in August Amidst Global Volatility
**MUMBAI, INDIA** – India’s financial landscape tightened in August, according to CRISIL’s Financial Conditions Index (FCI), which fell from 0.8 in July to 0.5 in August. The index, tracking major market segments, was impacted by global uncertainties stemming from divergent monetary policies and economic concerns.
The Federal Reserve’s rate cuts contrasted with the Bank of Japan’s hike, disrupting global financial flows, particularly in August. Investor sentiment was also dampened by weakness in the US and Chinese economies, leading to lower crude prices, a weaker US dollar, and easing US bond yields.
“These broad global developments affected various segments of India’s markets,” said CRISIL. Foreign Portfolio Investors (FPIs) inflows slowed in August, impacting equity markets the most. While the rupee depreciated slightly, the bond market benefited from falling crude prices and US yields, as well as the ongoing effects of India’s inclusion in the JP Morgan Emerging Market Bond Index.
Despite global headwinds, domestic factors remained supportive. Systemic liquidity conditions improved, bank credit growth remained robust, and easing domestic inflation, coupled with the impending Fed rate cut, created favorable conditions for the Reserve Bank of India (RBI) to potentially begin its easing cycle in the latter half of the fiscal year.
While FPIs continued to be net buyers in Indian markets, net inflows decreased to $3 billion from $5.8 billion in July. The equity segment saw a significant drop in FPI inflows from $3.9 billion to $0.9 billion due to increased volatility. Conversely, the debt segment saw robust inflows of $2.1 billion, although lower than the previous month’s $2.7 billion.
The rupee depreciated slightly against the US dollar, weakening by 0.4% to 83.9 from 83.6 in July. This was attributed to lower FPI inflows and a wider trade deficit. However, a weaker dollar offered some support to the rupee.
Market volatility intensified in August, with the Volatility Index averaging 14.9 (compared to 13.9 in July) due to the unwinding of the “yen carry trade” and concerns about a US recession. Despite the volatility, benchmark indices S&P BSE Sensex and Nifty 50 remained largely unchanged, rising by 0.1% and 0.5% respectively.
Some bank lending rates edged up in August. The one-year marginal cost of funds-based lending rate (MCLR) increased to 8.9% from 8.85%, while the auto loan rate rose by 1 basis point, averaging 9.82%. Deposit rates, however, remained stable at 6.86%.
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