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Unwinding of yen carry trade, lower FPI inflows, a mild depreciation in the Indian rupee, increased volatility in equity markets and rise in bank lending rates led to tighter financial conditions in India.
Global developments like a decline in crude prices, weaker US dollar and easing US bond yields helped some of the segments of India’s markets and hit the others. Foreign portfolio investors (FPIs) inflows reduced in August, hitting equity market the most, while the rupee depreciated mildly.
India’s financial conditions were tighter in August relative to July due to unwinding of yen carry trade, lower inflows from foreign portfolio investors, a mild rupee depreciation, increased volatility in equity markets and rise in bank lending rates.
CRISIL’s financial conditions index moderated to 0.5 in the month from July’s 0.8.
It expects two rate cuts by the central bank in this fiscal.
However, the bond market, which benefitted from falling crude prices and US yields, and the continuing effects of India’s inclusion in the JP Morgan Emerging Market Bond Index, handled the global turbulence better, the domestic rating agency said in a release.
Domestic factors remained supportive as systemic liquidity conditions improved and bank credit growth remained strong. Easing domestic inflation, coupled with the US Federal Reserve rate cut, is further creating conditions for the Reserve Bank of India to begin its easing cycle in the second half of this fiscal, the S&P Global company noted.
CRISIL expects RBI to begin cutting rates from October at the earliest, lest unpredictable weather events and geopolitical tensions play spoilsport. Overall, it expects two rate cuts in this fiscal.
Factors supporting financial conditions include higher surplus in systemic liquidity, softer money market rates, lower crude oil prices, declining US treasury yields, softer domestic bond yields and strong bank credit growth.
Fibre2Fashion News Desk (DS)
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