Financial conditions in India have recovered significantly after hitting the abyss in April: Crisil

India's financial conditions eased and are the best seen in two years, thanks to RBI’s sharp rate cuts and unconventional measures . But some pockets still have tighter conditions than their long-term averages, particularly credit growth, higher corporate bond spreads over G-Secs, which could delay transmission of policy rates, finds a new financial conditions index launched by ratings firm-Crisil.
Crisil's financial condition index which turned negative since the crisis at IL&FS in September 2018, started improving since July. " The FCI has been improving since then, and has turned positive since July. Currently, the financial conditions are the easiest seen in two years" say Crisil economists Dharmakirti Josdhi and Pankhuri Tandon in their report.

Even as RBI announced its accommodative measures even before the pandemic hits through unconventional measures such as Operation Twist and Long-Term Repo Operations (LTROs), implemented in January and February, it accelerated the easing measures with sharp rate cuts and stepped up unconventional measures in March after the pandemic hit.

The central bank also cut the repo rate by 115 bps ( one basis point is 0.01%) and the reverse repo rate by 155 bps and purchased ₨ 1.9 lakh crore of government bonds G-secs (on a net basis) until September, compared with Rs 0.9 lakh crore in the corresponding period last year. Systemic liquidity has increased significantly, as indicated by the RBI net absorbing Rs 6 lakh crore on average every month, compared with Rs 0.5 lakh crore in the same period last year. Besides, A number of measures on regulatory relaxation were also undertaken to ease the pain in the financial sector, including permitting moratoriums and debt restructuring by banks

This has helped reduce the interest rates in money and debt markets and has even got transmitted to bank lending rates to some extent' Crisil said. Equities also benefited from improving investor sentiment

India’s financial conditions were the tightest in a decade in April this year, once the lockdown to stem the Covid-19 pandemic began – the FCI value was far below one standard deviation from the long-term average, implying significant tightening. The only time when FCI dipped to a similar level earlier was in 2013, during the Fed taper tantrum.

However, the extent of easing has not been uniform, Crisil said. Short-term money market rates have fallen more than long-term bond yields. Among bonds, safe-haven G-secs and AAA-rated public sector benchmarks have eased more than lower-rated corporate bonds. The spreads of lower-rated corporate bonds (such as AA paper given below) over government benchmark remain much higher than long-term averages. Bank credit growth remains weak

Crisil chose to launch its financial conditions index because with the pandemic resulting in 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.

The index factored in parameters like performance of equity, debt, money and forex markets and also bank credit growth, lending rates, and money supply for evaluating the impact of monetary policy environment in the context of prevailing inflation conditions.