India’s financial conditions improved significantly in December

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 CareEdge Financial Conditions Index takes into consideration 28 macroeconomic and financial indicators encapsulating valuable insights into prospective economic conditions.
The FCI 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.

Strongest-ever monthly FPI inflows of USD 7.9 trillion in December 2023:

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.

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.

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.

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India’s financial conditions improved significantly