CII and IBA launch a Quarterly Financial Conditions Index

The Confederation of Indian Industry (CII) and Indian Banks’ Association (IBA) have launched a Financial Conditions Index for the Indian economy to make an assessment of the overall financial conditions on a quarterly basis.

For the first quarter of FY 2015-16, the CII – IBA Financial Conditions Index shows that the overall financial conditions for the Indian economy are favourably poised, as banks and financial institutions see significant improvement in the cost of credit and funding liquidity in the banking system with external financial linkages and economic activity witnessing relatively moderate improvement.

Commenting on the launch the index, Mr Chandrajit Banerjee, Director General, CII said “Sound financial conditions in an economy play an intrinsic role in determining monetary stability and thus proper functioning of the financial economy. Due to a strong positive correlation between the financial and real economy, it becomes an imperative to gauge the prevailing and projected financial situation vis-à-vis the macro-economic scenario on a continuous basis. The CII – IBA Financial Conditions Index is a significant step in this direction”.

Highlighting the key objectives of introducing the Index, Mr Arun Kaul, Deputy Chairman, IBA and Chairman & Managing Director, UCO Bank said that the CII – IBA Financial Conditions Index will (i) Serve as a key indicator in assessing the short term financial conditions in the Indian economy, (ii) Provide effective monitoring of current financial conditions for facilitating regulatory and policy decisions, (iii) Provide early signals on turning points in financial conditions, and (iv) Help tracking credit flow conditions for industry & service sectors from various channels.

The methodology used for constructing the CII – IBA Financial Conditions Index (FCI) is based on a survey (CII – IBA Financial Conditions Expectation Survey) of major banks and financial institutions on their expectations of key financial and economic variables determining financial conditions in the Indian economy.

The CII – IBA Financial Conditions Index, made up of 4 sub-indices - Cost of Funds Index, Funding Liquidity Index, External Financial Linkages Index, and Economic Activity Index, each with equal weights, has performed well across all the sub-indices, with index values much higher than 50. A reading above 50 is consistent with some combination of target respondents in which more respondents are reporting improvement or no change in financial conditions as against deterioration.

The Financial Conditions Index with a standing at 74.1, exhibits a positive outlook with signs of firm improvement in the prevailing financial conditions of the Indian economy in the first quarter of FY 2015-16.The improvement is expected on account of sound performance on Cost of Funds Index and Funding Liquidity Index. Further, the External Financial Linkages Index and Economic Activity Index also indicate improvement albeit at a relatively moderate level.

Among the sub-indices, the Cost of Funds Index with a value of 83.0 recorded the highest value across the four sub-indices as majority of the respondent banks and financial institutions expect both the short-term as well as long-term cost of funds to ease further.

The Funding Liquidity Index was recorded at 78.8 mark as respondents expect the RBI to continue to manage the liquidity effectively through the Liquidity Adjustment Facility (LAF) operations as well as the term repos and reverse repos window.

External Financial Linkages Index was recorded at 65.4, lowest among the four sub-indices. However, the silver lining was the expectation of the majority respondents of no major threat from the anticipated hike by the US Fed in interest rate in the near term.

The Economic Activity Index with a standing at 69.1 showed mixed performance across indicators. While improvement in the real GDP growth and pick up in Non-Food Bank Credit is anticipated, situation on the Inflation (Consumer Price Index) and Asset Prices (stock and housing market) are expected to witness no major change.

In terms of categories of respondents, the Foreign Banks were most optimistic for improvement in the financial conditions in Q1 FY 2015-16 followed by Private Sector Banks, Co-operative Banks, and Public Sector Banks whereas NBFCs were most conservative in their expectation of improvement in the financial conditions.