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Financial conditions remain broadly unchanged in Feb ‘21

Our proprietary Financial Conditions Index (FCI) score remained broadly unchanged in Feb 2021 from Jan 2021. However, the components of FCI recorded sharp movements. Debt market conditions worsened to 13-month low as supply concerns pushed up yields. Forex market conditions also worsened despite appreciating rupee as forward premia inched up sharply, possibly due to shift of currency interventions to the forward market. Good performance by the stock market, on the other hand, provided comfort.

* Financial conditions remain broadly unchanged in Feb 2021: Financial conditions in Feb 2021 remain broadly unchanged from the preceding month. FCI Score for Feb 2021 stood at 9.44 from 9.42 in Jan 2021 and 3.17 in Jan 2020. FCI score crossed 10 twice in the last one year: the first time in May 2020 when it reached 10.14 on the back of unprecedented liquidity infusion and monetary easing by the central bank and for the second time in Nov 2020 when it reached an all-time high of 10.51. Since then, financial conditions have moderated a bit, mainly due to sharp deterioration in debt market conditions and moderate worsening in forex market conditions.

* Aggregate demand conditions worsen moderately: Aggregate demand conditions worsened moderately during Feb 2021 compared to the preceding month. M3 money supply growth likely fell to 12.2% while non-food bank credit growth likely fell to 6.2% in Feb 2021, both down ~10bps from the Jan 2021 levels. Although aggregate demand conditions have revived in the recent past driven by modest pick-up in nonfood bank credit growth, AD conditions fell to 4-month low in Feb 2021. AD Score fell to 0.39 in Feb 2021 from 0.44 in Jan 2021 and -0.85 in Feb 2020.

* Money market conditions improve modestly due to rising surplus liquidity: Money market conditions improved to 3-month high mainly due to rising liquidity surplus and fall in CBLO rate. Liquidity surplus increased to Rs 6.8trn in Feb 2021 from Rs 6.4trn in the preceding month. While weighted average call rate inched up by 4bps during the month, CBLO rate fell 12bps. Overall, easy liquidity conditions and soft overnight rates improved money market score. Money Market Score improved to 3.25 in Feb 2021 from 3.05 in Jan 2021 and 0.86 in Feb 2020.

* Equity market conditions record sharp improvement: Sharp improvement in equity market conditions provided support to overall financial conditions index. Nifty averaged 14,957 in Feb 2021, up from 14,285 in the preceding month and 11,934 in Feb 2020. Nifty PE ratio also recorded modest increase. While domestic volatility as indicated by India VIX worsened during the month, falling global volatility as indicated by US VIX provided support to the market. Equity Market Score increased to 6.7 in Feb 2021 from 5.79 in the preceding month and 2.04 in Feb 2020.

* Debt market plays biggest drag on financial conditions: The biggest drag on financial conditions came from debt market which recorded lowest score in 13 months. Concerns about higher supply kept sentiment in the debt market choppy and led to sharp increase in yields during the month. Yields on the 1-yr, 5-yr and 10-yr government bond reached their highest levels since April 2020. 10-yr benchmark yield closed above 6% for the first time in the last ten months. Talks of stimulus also pushed US yields to their highest levels since March-April 2020. Corporate bond yields increased to their highest levels since Jun-Jul 2020 in line with rising risk-free yields. Debt Market Score fell to 1.74 in Feb 2021, down from 2.41 in Jan 2021 and an average score of 5.05 recorded during April-Dec 2020.

* FX score falls to 43-month low as forward premia inches up across tenors: Forex market score fell to 43-month low despite modest appreciation in the rupee. Forex Market Score fell to 1.19 in Feb 2021, down from 1.76 in Jan 2021 and 2.51 in Feb 2020 as forward premia across tenors inched up sharply. Shifting of currency intervention to the forward market could be behind this sharp spike.

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