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CareEdge has announced a significant improvement in India’s financial conditions for December 2023, as detailed in its latest CareEdge Financial Conditions Index (FCI) report. The FCI, which assesses 28 crucial macroeconomic and financial indicators, recorded a substantial rise to 44.6 in December 2023, nearing the +1 standard deviation mark, up from 35.7 in November. This improvement is attributed to favourable external conditions, robust equity market performance, and stability in the Indian rupee. Despite these gains, challenges persist in the debt and money markets, highlighted by an increased systemic liquidity deficit and widening credit spreads

The Indian equity market has witnessed its strongest-ever monthly FPI inflows of USD 7.9 trillion in December 2023, the highest-ever FPI inflow since December 2020. The strong rally in the Indian equity market in December has driven the PE ratio above 25 suggesting strong valuations. The CareEdge report also highlights a notable improvement in India's financial condition compared to the period in February 2022 when the Ukraine War commenced.

External Factors Remained Favourable

The report reveals that improvement in external conditions was widespread in December, characterized by a decline in Brent crude prices to below USD 80 per barrel, a moderation in global bond yields and the dollar index, robust performance in global equity markets, and a decrease in global equity market volatility. Crude prices continued to trend lower on the back of demand concerns and have so far been largely insulated from the rising geopolitical tensions in the Middle East. The MSCI emerging market index also saw a marginal increase at the tail end of 2023.

As per CareEdge, despite improvements in the external environment, impending decisions of major central banks such as the US Federal Reserve and the European Central Bank (ECB) in January and geopolitical conflicts especially in the Middle East remain key monitorable as these factors could potentially have spillover effects on the domestic economy.

Equity Market: Equity Markets Bounce Back in December

The equity market witnessed the strongest ever monthly FPI inflows since Dec 2020 on the back of expectations of a turnaround in the global monetary policy cycle and the recent state election victory of the ruling party. SENSEX rose by ~18% YoY in December which is the strongest growth since June 2023. December FPI inflows into the equity market stood at ~INR 7.9 trillion. The strong rally in the equity market has driven the PE ratio to 25.6, suggesting strong valuations.

Debt Market Conditions Remain Tight

The debt market tightened marginally compared to November as FPI inflows slowed sequentially and risk premiums, as measured by the credit spread of AAA and AA bonds, have risen. Even though the FPI inflows slow sequentially, it remained robust on the back of India’s inclusion in the global bond indices starting next financial year. The 10y G-sec yield has moderated marginally and was guided by global cues of a softer interest rate environment going ahead. The RBI also didn’t conduct any OMO sales in December.

CareEdge expects the 10Y benchmark yield to remain range bound between 7.00 and 7.25% in the near term with much of the focus remaining on the borrowing number of the upcoming budget.

Money Market Conditions Also Tightened Significantly

As per the report, tightness in the money market conditions is evident from the growing deficit of banking system liquidity which drove up money market rates. As of the end of December, the interbank call money rate is trading ~31 bps higher than the repo rate. Other short-term spreads like 3m CP spreads spread remain elevated compared to the past. The deficit in the banking system liquidity reached an all-time high of INR 1.6 trillion on the back of GST-related outflows and advance tax payments. The RBI in a bid to ease market liquidity conditions has conducted a variable repo auction worth INR 1.75 trillion in December.

CareEdge believes that going ahead, a pickup in government spending can ease the deficit in systemic liquidity to some extent. Additionally, G-sec worth INR 595.3 billion is due to mature towards the month's end which will further ease liquidity conditions. However, overall liquidity conditions are expected to remain tight.

Credit Growth Remains Strong Despite a Rise in Lending Rates

The report reveals that credit offtake continued to grow, increasing by ~ 20% year on year for the fortnight ending December 01, 2023. If we exclude the impact of the merger, credit grew at a lower rate of 16.4% YoY. While the credit growth remained robust, a rise in lending rates and MCLR rates have dragged on the index.

Rupee Appreciated as Volatility in the Forex Market Fell

The rupee has stabilized at ~USD 83/bbl appreciating marginally since November with a lower volatility partly due to RBI’s FX interventions ensuring orderly movement in the currency pairs. Over the past couple of months, softer UST yields and strong FPI inflows have supported the Indian rupee.

About CareEdge Financial Conditions Index

The CareEdge Financial Conditions Index takes into consideration 28 macroeconomic and financial indicators encapsulating valuable insights into prospective economic conditions. The monthly index by CareEdge looks at capturing the financial condition of India based on the evolving trends in the Money Market, the performance of the Debt/ Bond Market, the Equity Market, Banking, Foreign Exchange, and the External Environment. Well known statistical method of Principal Component Analysis (PCA) was used to capture the maximum possible variations in these 28 variables to come up with the CareEdge Financial Conditions Index.

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