RBI’s Financial Conditions Index – Tracking Market Health in Real Time

Financial Conditions Index Latest News

• In a bid to enhance real-time monitoring of the country’s financial health, a recent study by the Reserve Bank of India (RBI) has proposed the construction of a Financial Conditions Index (FCI) for India with a daily frequency.

Introduction

• To enhance real-time assessment of India’s financial ecosystem, the Reserve Bank of India (RBI) has proposed a Financial Conditions Index (FCI) with a daily frequency. 
• The FCI is a composite indicator that aggregates data across major financial segments to evaluate how tight or relaxed financial conditions are, relative to their historical average since 2012. 
• This move aligns with global central banking practices, where FCIs help gauge monetary transmission, inform policy decisions, and signal systemic stress.

Purpose and Structure of the Financial Conditions Index

• The proposed FCI aims to serve as a dynamic and high-frequency barometer of India’s financial stability by integrating data from:
  • Money Markets
  • Government Securities (G-Sec)
  • Corporate Bonds
  • Equity Markets
  • Foreign Exchange Markets
• According to the RBI study published in its June 2025 Bulletin, the FCI is designed to:
  • Measure the ease or tightness of financial conditions daily.
  • Capture trends across calm and volatile phases.
  • Serve as a macro-financial surveillance tool for policymakers.
• The FCI is built using 20 market-based indicators, and values are standardised to reflect changes in financial tightness or looseness in standard deviation units. A positive value indicates tighter conditions, while a negative value suggests easier financial conditions.

Evolution of Financial Conditions in Recent Years

• Post-Pandemic Recovery and Easy Financial Conditions
  • The COVID-19 pandemic led to a dramatic tightening of financial conditions due to a sharp sell-off in equity and corporate bond markets. 
  • However, this was followed by an exceptionally loose financial environment in 2021-2022, driven by the RBI’s proactive interventions, including:
    • Large-scale liquidity infusion
    • Policy rate cuts
    • Regulatory forbearance measures
  • During this period, the FCI reached a low of -2.197 in mid-June 2021, indicating extremely easy financial conditions.
• Periods of Tightening
  • Significant peaks in the FCI were observed during historical stress episodes, such as:
  • July 2013 Taper Tantrum: A peak of +2.826, primarily driven by tightening in bond and forex markets due to fears of US Federal Reserve tapering.
  • September 2018 IL&FS Crisis: Equity and bond markets contributed to financial tightening, reflecting stress in the NBFC sector.
  • Early 2020 COVID-19 Onset: Market panic due to the global economic shutdown led to a sharp tightening again.

Recent Trends and Current Financial Landscape

• Since mid-2023, India’s financial conditions have largely remained easy, aided by:
  • Robust equity market performance
  • Ample liquidity in the money market
  • Supportive government bond yields
• From November 2024, conditions started to tighten slightly, attributed to:
  • Rising global financial uncertainty following the US presidential election
  • Changing risk perception in bond and equity markets
  • Policy normalisation by global central banks
• However, by March 2025, the FCI moderated and returned to near-neutral levels, signalling stabilisation.

Significance and Policy Implications

• The introduction of a daily FCI is expected to strengthen India’s macro-financial analysis toolkit. Key implications include:
  • Real-time Monitoring: Enables early identification of stress build-up or excess exuberance.
  • Policy Calibration: Supports timely and data-backed monetary and fiscal policy decisions.
  • Market Guidance: Offers insights to financial market participants regarding liquidity and systemic risk.
• Globally, FCIs are used by institutions like the US Federal Reserve and European Central Bank. For India, a customised FCI tailored to its unique market dynamics will aid in improving monetary transmission and crisis management.

Future Outlook

• As India’s financial architecture becomes increasingly complex, the RBI’s daily FCI will play a pivotal role in ensuring financial stability. 
• By offering a unified, real-time view of multiple market segments, it empowers both policymakers and investors with actionable intelligence.
• Continued refinement of the index, such as inclusion of newer market indicators, algorithmic adjustments, and integration with other macroeconomic dashboards, can further enhance its utility.

Source : IE | BS

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