The CII-IBA Financial Conditions Index at 56.9 for Q1 FY 2017-18 reflects positive outlook in the overall financial condition in the Indian Economy as compared to the previous quarter (48) owing to the expectation of improvement in the overall financial conditions in the economy on account of growth of External Financial Linkages, Funding Liquidity Index and Economic Activity Index.

According to CII-IBA Financial Conditions Index for Q1 FY 2017-18, there was improvement in the expectation of banks and financial institutions which is captured in improvement in the Economic Activity Index (55.6). There is also improvement in Funding Liquidity Index (72.2), and External Financial Linkages Index (59.3). There has been a relative decline in the Cost of Funds Index (40.3) as compared to the previous quarter owing to the expectation of increase in the interest rates leading to deterioration in the expectation of short term interest rate and Marginal Cost of Lending Rate (MCLR).

There were 31 major banks and financial institutions who participated in the survey with a combined total assets of more than Rs.60 Lakh crores.

Releasing the Index for the first quarter of 2017-18, Mr Chandrajit Banerjee, Director General, CII said “The improvement of the Financial Conditions Index projects overall optimism in the Indian financial sector on the back of increase in consumption, infrastructure spending amplified by slew of landmark reforms as evidenced by rollout of GST and formulation of the stressed loans resolution package through an ordinance by amending the Banking Regulation Act. We are confident the Government and the RBI would continue to focus on the objectives of maintaining financial stability and sustaining steady economic growth”.

Commenting on the performance of the Index, Mr Rajeev Rishi, Chairman, IBA and Chairman & anaging Director, Central Bank of India said “Index reading of 56.9 per cent for the first quarter is a very positive signal. Since the banks have passed on the benefits of lower cost of funds in the last quarter of the previous year, further action in this quarter is not expected. However, funding liquidity index has shown the maximum upward movement indicating the liquidity position would be comfortable and banks are in a position to meet the credit demands of the productive and needy sectors”.

Performance of CII - IBA Financial Conditions Index for

Q1 FY 2017-18 vs Q4 FY 2016-17

Source: CII - IBA Financial Conditions Index - Round 7 April 2017

Among the sub-indices, the Economic Activity Index witnessed the maximum improvement to reach at 55.6 in Q1 FY 2017-18 from 31.4 in the previous quarter. This reflects that the majority of the respondent banks and financial institutions expect the overall economic activity to improve in the April 2017 quarter.

The External Financial Linkages Index was recorded at 59.3, second highest value among the sub-indices, recording significant improvement from the previous quarter (35.3). The Indian financial sector remained unperturbed from the effects of the US Fed interest rate. The IMF World Economic Outlook released in April, 2017 also paints a bright picture for India. CII also expects GDP to grow at 7.5% to 8% for the year 2017-18. This is a big positive for the country.

The Funding Liquidity Index was recorded at 72.2, third highest value among the sub-indices, recording improvement from the previous quarter (59.3). The number is significantly higher than the 50 mark, signaling a strong expectation of improvement in the funding liquidity in the Indian financial system.

The Cost of Funds Index with a standing at 40.3 witnessed deterioration from 66 in the previous quarter. The deterioration on a quarter on quarter basis was led by the performance on the short term interest rate and MCLR which was expected by majority of the respondent banks and financial institutions to deteriorate. Majority of the respondents expected increase in the interest rate.

The overall CII - IBA Financial Conditions Index stands at 56.9 in Q1 FY 2017-18. The CII - IBA Financial Conditions Index was launched in April 2015 to (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.