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Worst is over! Financial conditions make full-throttle recovery in India, says CRISIL

Currently, financial conditions in India are easiest seen in two years, says CRISIL. As per the ratings agency, the RBI's sharp rate cuts and unconventional measures have helped ease financial conditions

twitter-logoBusinessToday.In | October 28, 2020 | Updated 15:26 IST
Worst is over! Financial conditions make full-throttle recovery in India, says CRISIL
Monetary policy has done most of the heavy lifting so far, says CRISIL

Financial conditions in India have staged a full-throttle recovery from the harrowing abyss the country had been sent flailing into by the COVID-19 pandemic in April, CRISIL's Financial Conditions Index (FCI) shows. The ratings agency has credited the financial recovery for the Reserve Bank of India (RBI), whose overtures to maintain easier financial conditions helped mitigate macroeconomic damage.

The ratings agency said while easy global monetary policies helped, the RBI's accommodative stance also contained short-run pressures. Notably, RBI governor Shaktikanta Das, during his October 2020 monetary policy briefing, had said the central bank was ready to undertake further measures to assure market participants of access to liquidity and easy financing conditions. "It sure has, so far," CRISIL said.

Also read: India to be among fastest-growing economies in FY22: FM Nirmala Sitharaman

Highlighting the existing economic troubles, the agency said pockets of stress remain, including weak bank credit growth, wider spreads on lower-rated corporate bonds, and fundamental pressures due to high government borrowing. It said monetary policy has done most of the heavy lifting so far, and that around 65% of fiscal stimulus announced in May was in the form of liquidity and credit support.

The ratings agency says as indicated by the negative values of the Financial Conditions Index, the financial conditions had been tightening since the IL&FS default in 2018. The COVID-19 pandemic only magnified this. Consequently, India's financial conditions were the tightest in a decade in April, once the lockdown to stem the COVID-19 pandemic began.

The FCI value was far below one standard deviation from the long-term average, implying significant tightening. But, it has been improving since then and turned positive since July. Currently, the financial conditions are the easiest seen in two years, it said. The RBI's sharp rate cuts and unconventional measures have helped ease financial conditions. Some pockets still have tighter conditions than their long-term averages, particularly credit growth by banks. "This could delay transmission of policy easing to the broader economy," CRISIL said.

Also read: COVID-19 impact on India's states is scary! RBI's new report shows how bad it is

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