Major banks, FIs largely optimistic on economy

NEW DELHI: Major banks and financial institutions in the country are ‘largely optimistic’ about the Indian economy, according to a survey assessing the country’s short-term financial conditions.

The CII-IBA Financial Conditions Index, which is based on a survey of 22 banks and financial institutions, slipped 1.5 points quarter-on-quarter in the three months to December, but remained comfortably above 50 at 68.9. A reading above 50 on the index is considered largely optimistic, 50 is optimistic and below 50 is considered sub-optimistic.

“The stimulus measures announced for various sectors are expected to help in improving the investment demand in the coming quarters,” VG Kannan, chief executive at IBA, said in a statement.


There was substantial optimism across three of the four sub indices—external financial linkages index, funding liquidity index, and cost of funds index—which rose over their previous values. The fourth sub index—economic activity index—indicated ‘moderate optimism’ for the quarter.

Among the sub-indices, the highest contribution was from the cost of funds index, which fell to 77.8 from 80.7 in the previous quarter. But most of the respondent banks and financial institutions expect short-term interest rates (interbank call rate and three-month bank certificate of deposit rate) and longterm interest rates (yield on 10-year government bonds and marginal cost of funds-based lending rate) to come down, which will lower the cost of funds.

The funding liquidity index improved to 72.7 from 68.2, while the external financial linkages index recorded a value of 71, which was marginally lower than 73.4 in the previous quarter. CII, however, said the value registered is extremely optimistic and is due to an optimistic expectation of increase in foreign exchange reserves, mobilization through ADRs, GDRs, ECBs and FCCBs, and net capital inflows.

“The liquidity position and lower cost of funds augur for a pickup in credit and economic growth,” Kannan said.

The economic activity index posted a reading of 54.0 over 59.4 in previous quarter. According to the survey, the value was supported by optimism regarding the growth in GDP, asset prices and non-food bank credit.

India's GDP growth hit an over six-year low of 4.5% in July-September 2019.

The government is hopeful of a revival in the third and fourth quarters of FY20 as it sees the reform measures initiated by it paying off.

“CII feels along with undertaking measures to support the economy, it is equally important to focus on faster transmission of lower rates to consumers through banks for a sustainable credit flow into the economy,” said Chandrajit Banerjee, director general at CII.