Pincer effect of both global and domestic factors

• Crisil’s Financial Conditions Index (FCI) ¹ reflected tighter milieu in January amid rising global uncertainties. Indicating relative tightness in liquidity conditions, the index entered the negative zone for the first time in 22 months. The FCI stood at -0.5 in January, compared with 0.3 in December. Lower the value, tighter the financial conditions
• Despite entering the negative zone, from a long-term trend perspective the FCI remains in the identified comfort zone i.e., within one standard deviation from the long-term average
• Sharp depreciation in the rupee against the dollar (by 1.5% on-month and 3.8% on-year), a pullback by foreign portfolio investors (FPIs) and a possible-defensive foreign exchange intervention by the Reserve Bank of India to curb rupee volatility brought tightness in financial conditions
  
• Domestic liquidity deficit hit a 15-year low to reach Rs 3.15 lakh crore on January 23, putting an upward pressure on money market rates
• In February, citing a softer inflation outlook, the Monetary Policy Committee (MPC) of the RBI cut the repo rate by 25 basis points (bps), while maintaining its neutral stance, which allows it the flexibility to move based on data. Meanwhile it remains committed to provide sufficient system liquidity to ensure rate actions are transmitted