NEW DELHI:Financial conditions in India have staged a full-throttle recovery from the harrowing abyss they had been sent flailing into by the Covid-19 pandemic in April, Crisil's new Financial Conditions Index (FCI) showed on Wednesday.
Credit for this goes to the Reserve Bank of India (RBI), whose overtures to maintain easier financial conditions -- in lockstep with central banks elsewhere -- have helped mitigate the large and broad-based economic damage caused by the pandemic, according to a report by Crisil Research based on the findings of the new index.
While easy global monetary policies have helped, the RBI's accommodative stance has helped contain short-run pressures no less, the report said.
"The RBI stands ready to undertake further measures as necessary to assure market participants of access to liquidity and easy financing conditions, " RBI Governor Shaktikanta Das had said at the October 2020 monetary policy meeting.
Even with liquidity measures, the FCI shows that pockets of stress remain as evident in weak bank credit growth, wider spreads on lower-rated corporate bonds, and fundamental pressures due to high government borrowing.
Crisil said it went ahead with the index as the financial markets are an economy's critical plumbing system, through which funds flow to those in need. They become all the more important during economic crises, when incomes and cash flows are disrupted for businesses and households. Today, with the pandemic sparking off 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.
Monetary policy -- which has done most of the heavy lifting so far -- works its way to the economy through altering financial conditions.
This time, a large part of fiscal stimulus is also in the form of credit-enhancing measures, which depend on the financial sector for implementation. As per Crisil's estimate, 65 per cent of fiscal stimulus announced in May was in the form of liquidity and credit support.
The Crisil's FCI had basically tried to answer questions over how have the financial conditions in India fared amid the pandemic and what has been the impact of RBI measures.
To answer these, the agency looked at movements in key parameters across various financial markets in India, including equity, debt, money and forex markets. It also took into account financing conditions for the broader economy by including variables such as bank credit growth, lending rates, and money supply.
Finally, Crisil evaluated the impact of monetary policy environment in the context of prevailing inflation conditions.
All these variables were aggregated these into an index -- the FCI -- that can be used to track the state of financial conditions over time.