While the central bank's accommodative stance should help in the short-run, it remains to be seen until when and to what extent these pressures will be masked, it added.
Financial conditions in India have witnessed a speedy recovery from the COVID-19 pandemic-led “harrowing abyss” courtesy the Reserve Bank’s interventions, domestic credit rating agency Crisil said on Wednesday.
While easy global monetary policies have helped, the RBI’s accommodative stance has contained short-run pressures no less, the agency said, citing its newly-launched monthly Financial Conditions Index (FCI).
“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,” it stated.
It said the central bank’s measures have helped mitigate the large and broad-based economic damage caused by the pandemic.
However, it made it clear that pockets of stress still remain, pointing to the weak bank credit growth, wider spreads on lower-rated corporate bonds, and fundamental pressures due to high government borrowing.
The agency has used 15 conditions for constructing the FCI, which includes monetary policy conditions, money market, equity markets, external finance conditions, bank lending conditions and money supply in the economy.
It said the FCI is designed to give a comprehensive measure of financial conditions for the Indian economy by capturing price and supply variables across financial markets, along with prevailing risk sentiments.
Not only does it capture the extent of monetary policy transmission across various financial market segments, but also evaluates the policy stance itself in the context of prevailing inflation conditions, it said.
The financial conditions had been tightening since the IL&FS default in 2018, leading the FCI to turn negative, it said, adding that the COVID-19 pandemic only magnified the same to make it tightest in a decade in April 2020.
The FCI value was far below one standard deviation from the long-term average, implying significant tightening, it said. “The only time when FCI dipped to a similar level earlier was in 2013, during the Fed taper tantrum”
However, the FCI has been improving since then and turned positive in July. Currently the financial conditions are easiest in two years, it stated.
It said RBI’s sharp rate cuts and unconventional measures have helped ease financial conditions.
The multitude of steps taken by the RBI, coupled with global easing have helped ease the financial conditions in India visibly since April, though weak bank credit growth, wider spreads of lower-rated corporate bonds, and fundamental pressure imposed by high government borrowing indicate that some stress persists, it said.
While the central bank’s accommodative stance should help in the short-run, it remains to be seen until when and to what extent these pressures will be masked, it added.