Financial Conditions to Tighten in the Coming Weeks

Domestic financial conditions will probably tighten in the upcoming few months because of a likely rise in capital outflows, driven by increasing domestic vulnerability and external shocks, as per recent research done. Also, the State Bank of India, and a few other leading banks, have increased their lending rates, thus increasing the borrowing cost.

Nevertheless, measures to reduce the current account deficit and reinforce foreign exchange reserves may help the country deal with any external shock. The country’s vulnerability critically depends on the crude oil prices as they can impact its major macroeconomic indicators such as the gross domestic product, current account deficit, inflation, rupee and, in a few cases, the fiscal deficit.

The Reserve Bank of India (RBI) has already initiated the normalisation process by restoring the Liquidity Adjustment Facility (LAF) policy corridor to its pre-pandemic range, thereby indicating withdrawal from the accommodative stance in the upcoming months.

State Bank of India has increased its Marginal Cost of Funds Based Lending Rate (MCLR) by ten basis points (bps) or 0.1 % for all tenures. For borrowers, this move would increase their payable EMIs. Bank of Baroda (public sector) and Axis Bank (private lender) have also hiked their MCLR by five bps across tenors.

The country is anticipated to be in a better position when compared to the 2013 taper tantrum since the inflation and current account deficit will probably be relatively lower. Also, the foreign exchange reserves are sufficient to cover the short-term liabilities of the country. This will help lessen, if not eliminate, the effect of external shocks on the rupee.

For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in