India Sees Easing Of Financial Conditions In July Amid Global Headwinds
India's financial conditions showed significant improvement in July, driven by increased foreign investment, surplus liquidity and eased money market rates
In India, the domestic financial conditions eased to 0.8 in July from 0.5, according to data shared by the Crisil Financial Conditions Index (FCI), a summary indicator capturing India’s major market segments.
The global environment was broadly conducive as investors geared up for imminent rate cuts by the US Federal Reserve (Fed). Foreign portfolio investor (FPI) inflows rose sharply to debt and equity markets. India’s formal inclusion in the JP Morgan Emerging Markets Bond Index at the end of June also gave a fillip to debt market FPI inflows, it added.
"Domestically, liquidity conditions improved and interest rates eased across money and debt markets. For the broader economy, bank credit growth strengthened in the month," according to the report.
Amid sustained strong credit growth, the RBI governor flagged the need to monitor excessive leverage in certain retail segments mostly for consumption purposes. It flagged high growth in home equity loans and gold loans. The latest sectoral bank credit does indeed show strong growth in these segments.
Talking about foreign portfolio investors (FPIs), the report added that net FPIs increased for the third straight month to USD 5.8 billion in July compared to $5 billion in June, driven by higher inflows in both debt and equity segments. Inflows rose to USD 2.7 billion from USD 1.8 billion in the debt segment and to USD 3.9 billion from USD 3.2 billion in equity markets
The yield on the ten-year US treasury note dropped 6 basis points to an average of 4.25 per cent, sparking hopes of a rate cut due to higher unemployment and lower inflation. Systemic liquidity turned surplus in July, thanks to increased government spending and robust FPI inflows, leading to a net absorption of Rs1.03 lakh crore by the RBI.
Excess liquidity pulled down money market rates, with the weighted average call money rate falling 8 basis points to 6.51 per cent. Indian bond yields also declined, with the 10-year benchmark yield marginally decreasing to 6.97 per cent. A lower fiscal deficit target, surplus liquidity, and a surge in FPI inflows into debt contributed to this decline, Crisil added.
Equity markets hit all-time highs in July, with the S&P BSE Sensex and Nifty 50 indices rising 4.7 per cent and 4.8 per cent respectively. Robust quarterly earnings, positive global cues, and rising FPI flows boosted the markets, while volatility decreased with the India Volatility Index averaging 13.5 in July.
The Indian rupee remained stable against the US dollar in July, averaging 83.6 per dollar, thanks to steady foreign portfolio investor (FPI) inflows. Notably, the bank credit growth accelerated to 15.5 per cent in July from 13.9 per cent in June, with agriculture leading the way at 17.4 per cent, followed by personal loans at 16.6 per cent. Within personal loans, credit card outstanding continued to drive growth, albeit at a slower pace, while loans against gold jewellery saw high credit growth at 30.6 per cent. Home loans also saw robust growth at 18.2 per cent, prompting the RBI to caution against excessive leverage in these segments.
Services credit growth was at 15.1 per cent, while industry credit grew at 7.7 per cent. Non-banking financial companies (NBFCs) saw credit growth of 8.5 per cent. Despite steady bank lending rates, which remained above pre-pandemic levels, credit growth accelerated relative to the previous month. The one-year marginal cost of funds-based lending rate (MCLR) and home loan rate were stable at 8.85 per cent and 9.35 per cent, respectively, while the auto loan rate rose slightly to 9.81 per cent.
Easing Financial Conditions, Watchful RBI
The RBI’s Monetary Policy Committee (MPC) kept policy rates unchanged for the 17th month in a row. The MPC has its eyes on food prices, which have been the biggest hurdle in reducing overall inflation. Globally, monetary policies are shifting and diverging across major central banks. The European Central Bank initiated a rate cut in June, followed by the Bank of England at July-end. However, the Bank of Japan hiked its policy rate at July-end. And while the Fed has not changed its policy rates so far, it is expected to cut rates in September following a sharp weakening in the country’s labour market.
Diverging monetary policies have induced volatility in global markets. In particular, the unwinding of the yen carry trade put pressure on foreign portfolio inflows and the rupee in early August. “That said, Fed rate cuts are expected to give room for RBI to ease rates," according to the report. S&P Global expects the Fed to cut rates by a total of 50 bps in calendar year 2024 and 100 bps in 2025.
The food challenge to a rate cut is expected to ease as agriculture prospects look better than last year with an above-normal monsoon and higher kharif sowing. This picture will become clearer by September. “Due to these factors, we expect the RBI to begin cutting rates from October at the earliest, lest weather and international commodity prices play spoilsport. Overall, we expect two rate cuts this fiscal,” Crisil mentioned.
