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Indian Express
2 days ago
- Business
- Indian Express
RBI study proposes daily financial conditions index to track market trends
In a bid to enhance real-time monitoring of the country's financial health, a recent study by the Reserve Bank of India (RBI) has proposed the construction of a Financial Conditions Index (FCI) for India with daily frequency. The proposed FCI would serve as a composite indicator, designed to capture and reflect the prevailing conditions across key segments of the financial system — including the money market, government securities (G-sec), corporate bonds, equities, and the foreign exchange market. According to the RBI research study, the index aims to provide a high-frequency gauge of how tight or easy financial market conditions are, relative to their historical average since 2012. By aggregating signals from various market-based indicators, the FCI is expected to offer valuable insights into the broader financial environment, potentially aiding policymakers, analysts, and market participants in decision-making. The proposed construction marks a significant step towards improving the assessment of macro-financial dynamics in India's rapidly evolving financial landscape. 'The estimated FCI traces movements in financial conditions in India across both periods of relative calm as well as crisis episodes. The index suggests that in the aftermath of the pandemic, exceptionally easy financial condition was driven by the combined impact of amiable conditions across all market segments,' the RBI study said. Financial conditions continued to remain relatively easy since mid-2023 before firming up from November 2024. In the current financial year, however, it has remained congenial riding on a buoyant equity market and a money market suffused with liquidity, the study said. 'The newly constructed FCI for India assesses the degree of relatively tight or easy financial market conditions with reference to its historical average since 2012. The FCI is based on twenty financial market indicators at daily frequency for a long period and closely tracks the turning points in financial conditions, as observed across major episodes in the sample period,' it said. The study said a higher positive value of the FCI is indicative of tighter financial conditions. To present our results, we use the standardised FCI. Standardisation helps in interpreting the changes in financial condition in terms of standard deviation units. 'For example, within our sample period, financial condition was at its tightest at end-July 2013 during the taper tantrum episode, with the estimated standardised FCI at 2.826 — almost a 3-standard deviation tightening relative to the historical average,' it said. However, the FCI stood at -2.197 at mid-June 2021 — indicating the exceptionally easy financial conditions post-Covid. The peaks in FCI are associated with major events like the taper tantrum in 2013, stress in the non-banking financial companies (NBFC) sector during the Infrastructure Leasing and Financial Services (IL&FS) episode and the onset of the COVID-19 pandemic, it said. During May to July 2013, apprehensions of the likely tapering of US bond purchases under quantitative easing (QE) triggered outflows of portfolio investment from EMEs including India, particularly from the debt segment. This prompted an increase in credit risk premiums in the bond market and pressures on the rupee, the study said. The exceptional tightening of financial conditions during the taper tantrum was primarily driven by the bond and forex market. 'During the IL&FS episode, bond and equity markets were the major drivers of tightening financial conditions. Default by IL&FS in September 2018 led to panic in the bond market amidst tight liquidity conditions in the system, thereby increasing the credit risk premium, the study said. 'The next peak in the index is evident during the early COVID-19 period. The onset of the COVID-19 pandemic resulted in seizure of economic and trading activity that triggered market turmoil on an unprecedented scale. The tightening of financial conditions at the beginning of the Covid period was driven by a sharp sell-off in the equity and corporate bond markets,' it said. The exceptionally easy financial condition that followed this tightening was driven by the combined impact of easing across all market segments, facilitated by the conventional and unconventional measures of the Reserve Bank during 2021-2022, it said. The conditions continued to remain relatively easy since mid-2023 before firming up from November 2024 on account of the relative tightness in equity, bond and money markets triggered by the rising US exceptionalism after the presidential elections. After peaking in early March 2025, the FCI has since reverted to its historical average, suggesting close to neutral financial conditions. The major drivers of the easing during this period were easy money market conditions due to large liquidity injection by the RBI, change in the policy rate and the stance, followed by a buoyant equity and G-Sec market, the study said.
Qatar Tribune
15-06-2025
- Business
- Qatar Tribune
Financial conditions remain highly resilient amid trade wars uncertainty
The beginning of the year launched under a general tone of optimism, underpinned by a benign economic growth outlook, policy rate cutting cycles by central banks in major advanced economies, and constructive overall investor sentiment. At that time, investors and analysts were directing most of their attention to any signs that would uncover the direction of the US economy under the incoming administration of President Trump. The new government inaugurated with a strong mandate, as well as the unambiguous willingness, to shake policy and support a pro-business agenda, suggesting an end to the 'business as usual' decision making. Initially, this shift was met with optimism, as markets awaited further tax breaks and deep de-regulation. These expectations supported a rally in US equities and the USD, pointing to US global outperformance. However, market sentiment began to reverse sharply as the new government began to unveil its policy agenda. On April 2, President Trump declared 'Liberation Day,' announcing sweeping tariffs – including a 10% baseline on all imports, and higher rates on selected countries – with the vague goal of asserting US economic independence. Financial markets reacted negatively to the announcements, with US Treasury yields rising on fears of de-anchored inflation expectations and tainted policy credibility, while the growth narrative debated the odds of a recession, and major stock markets reversed back to pre-election levels. The Financial Conditions Index (FCI) provides an informative summary of the overall state of markets in advanced economies. The FCI spiked after Liberation Day, briefly reaching levels that typically mark moments of stress, and interrupting the previous trend of easing conditions. In our view, market dislocations will prove to be temporary, and financial conditions are set to improve and resume a more benign trend. We discuss the three main factors that support our outlook. First, central banks in the two major advanced economies are on track to continue with their policy rate cutting cycles, which will contribute to bring global interest rates down. In the US, inflation is gradually returning to the 2% target of monetary policy, while the economic growth consensus has weakened to a 1.4% expansion for this year, half of the 2.8% rate in 2024. These conditions should prompt the Federal Reserve to implement two further policy rate cuts of 25 basis points (b.p.) during the year, taking the upper bound of the policy benchmark rate to 4%. In the Euro Area, subduing wage and services price pressures support the disinflation trend, while the growth outlook has continued to deteriorate. With this backdrop, the European Central Bank (ECB) is expected to implement one additional rate cut of 25 b.p. during the year, taking the benchmark deposit rate to 1.75% by end-2025. Lower policy rates by the Federal Reserve and the ECB will further reduce borrowing costs for households and business, adding support to consumption and investment. Second, after a period of high volatility, corporate credit spreads are narrowing, signalling improved market sentiment and easier credit for firms. Corporate credit spreads, defined as the difference between interest rates paid by firms and those paid by sovereigns, are a key indicator of financial conditions, reflecting the compensation demanded by investors for bearing the credit risk of companies. Investment-grade and high-yield spreads have been on a downward trend for several years, interrupted by the recent trade rifts and the uncertainty this represented for investors. Corporate spreads have come down since their peaks this year, and are likely to descend towards more supportive levels, as the more damaging trade-war outcomes become less likely. Third, after a significant correction following Liberation Day, stock markets have staged a notable recovery backed by resilient corporate earnings and the expectations of monetary easing. Furthermore, markets expectations have readjusted on the premise that initial tariffs threats set the point of departure for negotiations. In the US, major indices have approached previous highs, reflecting increased confidence in a soft landing scenario and the prospects of policy rate cuts, as well as better-than-expected results in key sectors. In Europe, the MSCI Europe Index has been one of the best performing regional indices this year, rising by close to 20% in dollar terms, with a boost provided by Germany's historical fiscal policy shift and alleviating energy price pressures. Going forward, absent a major re-escalation of trade retaliations, or a re-ignition of hard-landing fears, the environment will continue to be supportive for stocks in the major advanced economies. All in all, in our view, after a bout of significant market volatility, financial conditions in advanced economies will slowly resume their positive trend towards a more supportive environment on the back of policy rate easing cycles, improving corporate credit spreads, and a supportive environment for stock markets. — By QNB Economics
