Context: The Reserve Bank of India (RBI) has proposed a daily Financial Conditions Index (FCI) to enhance real-time monitoring of India’s financial health.
| Relevance of the Topic: Prelims: Key facts about Financial Conditions Index. |
Daily Financial Conditions Index
- The FCI is a composite index proposed by the RBI to track real-time financial market conditions in India on a daily basis.
- It is designed to capture and reflect the prevailing conditions across key segments of the financial system including-
- Money market
- Government securities (G-sec)
- Corporate bonds
- Equities
- Foreign exchange market
- The index aims to provide a high-frequency measure of how tight or easy financial market conditions are, relative to their historical average since 2012.
Features of Financial Conditions Index
- The FCI is built using 20 market-based indicators.
- The FCI is standardised- meaning values are shown in standard deviations from the average (since 2012).
- The proposed FCI traces movements in financial conditions in India across both periods of relative calm as well as crisis episodes.
- Higher positive FCI indicates tight financial conditions.
- Lower negative FCI indicates easy financial conditions.
Objective of daily Financial Conditions Index
- To provide a real-time, daily assessment of India’s financial environment.
- To help policymakers, analysts, and market participants understand how monetary and financial conditions evolve.
- To track stress or buoyancy in different financial market segments.
- To improve timely policy responses during periods of financial turbulence or boom.
Implications
- Helps RBI assess how financial markets respond to interest rate or liquidity changes.
- Works as an early warning system for economic stress.
- Supports data-driven decision-making in fiscal and monetary policy.
Key Events Tracked by the Financial Conditions Index
The FCI has effectively captured major episodes of financial stress and easing in India:
- Taper Tantrum (2013): Financial conditions tightened significantly due to fears of the US Federal Reserve reducing its bond purchases. This led to capital outflows, a falling rupee, and rising bond yields.
- IL&FS Crisis (2018): The default by IL&FS caused panic in the bond market, increased credit risk premiums, and led to tighter financial conditions.
- COVID-19 Outbreak (2020): The onset of the pandemic triggered a severe tightening of financial conditions due to a sharp sell-off in equity and corporate bond markets.
- Post-COVID Period (2021-2022 ): The index suggests that in the aftermath of the pandemic, exceptionally easy financial conditions were driven by the combined impact of amiable conditions across all market segments.
- Mid-2023 to Early 2025: Conditions remained largely easy, backed by buoyant equity markets and surplus liquidity, before tightening from November 2024 due to global policy shifts.
- March 2025: FCI peaked again briefly but later normalised, indicating a return to near-neutral financial conditions.