The CII-IBA Financial Conditions Index (FCI) for Q4 (January-March) FY2018-19 has recorded a staggering rise, vaulting above the 60-mark for the first time in three quarters, on expectation of an improvement in the overall economy on account of all factors — External Financial Linkages, Funding Liquidity Index, Economic Activity Index and Cost of Funds Index.
The FCI in the fourth quarter of 2018-19 jumped to 62.9 from 37.1 in the preceding (Q3) quarter. An FCI reading below 50 is considered sub-optimistic; 50 is optimistic; and above 50 is considered largely optimistic.
The FCI is derived from the financial conditions expectation survey undertaken in January 2019, wherein a total of 28 entities participated, including 11 public sector banks, seven private sector banks, three foreign banks, one cooperative bank, and six leading non-banking finance companies.
Among the sub-indices, the Cost of Funds Index improved 35.7 points quarter-on-quarter (QoQ) to 58.5.
“The movement in the call money rate from December 2018 to January 2019 shows a reduction of 14 basis points. Similarly, the Certificate Deposits (CD) rate has also come down by 30 to 35 basis points during the same period. This supports the views of majority of the respondents who believe that interest rates would be benign in this quarter of the year which is indeed good for the economy,” the Survey said.
As per the survey, while 57.1 per cent expect no change in the marginal cost of funds-based lending rate (MCLR), 21.4 per cent of the respondents expect th MCLR will increase. Another 21.4 per cent of the respondents do not expect any favorable change in MCLR.
The Funding Liquidity Index improved by 34 points QoQ to 61.2. This index indicates the likely liquidity position in the market.
According to the survey, 67.9 per cent respondents expect that the borrowing by banks through the LAF (liquidity adjustment facility) window will decrease; 17.9 per cent of the respondents expect the borrowing by banks through the LAF window to remain the same and the remaining 14.3 per cent expect an increase in the borrowings.
“If the borrowings through LAF window is less, then it indicates sufficient liquidity in the system. In the month of January 2019, system had tighter liquidity situations owing to the outflow due to Goods and Services Tax. Further, RBI had indicated that it is committed to provide sufficient liquidity in the markets through OMOs (open maket operation purchase of government securities),” the Survey said.
The External Financial Linkages Index improved by 31.5 points Q-o-Q to 67.4. According to the Survey, 25 per cent of the respondents expects the foreign exchange reserves to decrease, with 46.4 per cent expecting it to increase, while nearly 29 per cent expect it to remain the same.
In1 terms of net capital inflo4ws, 60.7 per cent of the respondents expect that the investment by FIIs (foreign institutional investors) will increase. Since economic growth is quite impressive and other macro-economic fundamentals are also showing improvement, the Survey observed that the FIIs inflows will show an upward trend in this quarter.
In terms of nominal exchange rate, approximately 68 per cent of the respondents expect the exchange rate to appreciate and some 21 per cent of the respondents expect the exchange rate to depreciate. During the last one month, there was not much of volatility in the rupee/US dollar movement.
The Economic Activity Index nudged up 2.2 points to 64.7. This value of economic activity index is supported by high optimism regarding the growth in GDP as well as non-food bank credit pick up.
The Survey indicates 50 per cent of the respondents expect GDP growth to increase in the current quarter, with nearly 29 per cent expecting otherwise while the remaining 21.4 per cent of the respondents believe that the GDP growth will remain the same.
“Deceleration in crude oil prices, and the slower pace of monetary policy tightening across the globe are expected to help in India’s economic growth. Majority of the respondents concur with the bright growth prospects for the country,” the Survey said.