Financial conditions ease in April; external headwinds to weigh: CRISIL

Major central banks likely to increase pace of tightening to combat inflation; US Fed has already raised its policy rate twice until May, and S&P expects five more hikes in 2022

The reading on CRISIL’s Financial Conditions Index (FCI) eased in April relative to previous month as some of the global headwinds set in motion by the Russia-Ukraine war stabilised.

On the domestic front, some tightness in interest rates was seen following the RBI policy in April. Yet, the real policy rate stayed negative (as inflation remains higher than the repo rate), while bank lending rates remained at decadal lows. This, along with improving economic activity, contributed to a recovery in credit growth, CRISIL said in a statement.

CRISIL’s FCI is a monthly tracker based on 15 key parameters across equity, debt, money and forex markets, along with policy and lending conditions. Positive values of the index are associated with easier-than-average financial conditions, while negative values are associated with tighter-than-average financial conditions.

External headwinds are expected to get stronger in the coming months as major central banks increase their pace of tightening to combat inflation. The US Federal Reserve has already raised its policy rate twice until May, and Standard & Poor’s expects five more hikes in the remainder of 2022.

The Reserve Bank of India has joined the rate hike bandwagon with its off-cycle rate hike of 40 bps in May. Given the deteriorating inflation outlook and the need to move along with tightening global financial conditions, we expect another 75-100 basis points hike in repo rate in the remainder of this fiscal.

All these factors are expected to tighten domestic financial conditions, and will reflect in rising interest rates, bank lending rates, weak capital flows and depreciating currency, it added.