India's financial conditions improved significantly in Dec: CareEdge

External factors like geopolitical tensions and energy prices must be monitored, says rating agency

India’s financial condition significantly improved sequentially in December 2023 on the back of favourable external conditions, equity market performance, and the rupee’s stability, said CareEdge Ratings on Thursday.

The reading on CareEdge Financial Conditions Index (FCI), which assesses 28 macroeconomic and financial indicators, increased to 44.6 in December 2023 from 35.7 in November.

Challenges persist in the debt and money markets despite other gains, marked by increased systemic liquidity deficit and widening credit spreads. There is a need to be cautious about external factors like geopolitical tensions in West Asia and its impact on energy prices, said the rating agency in a statement.

India’s equity market got its strongest-ever monthly inflows (of $7.9 trillion) from foreign portfolio investors (FPIs) in December 2023, the highest since December 2020. The strong rally in the Indian equity market in December has driven the price to earnings (PE) ratio above 25, suggesting strong valuations.

CareEdge Ratings said external conditions improved in December, marked Brent crude prices declining to below $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. The MSCI emerging market index also saw a marginal increase at the tail end of 2023.

Despite the improved external environment imp, impending decisions of the US Federal Reserve, the European Central Bank (ECB) and other central banks in January and geopolitical conflicts especially in the Middle East must be monitored. These factors could have spill over effects on the Indian economy, said CareEdge.

The agency expected the 10-year benchmark yield (the government of India bond) to remain range bound between 7.0 and 7.25 per cent in the near term with much of the focus remaining on the borrowing number of the upcoming budget.

Money market conditions tightened significantly. This was 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 was trading ~31 bps higher than the repo rate, it added.