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The imposition of a 50 per cent tariff hike by the United States (US) on the imports from India weighed on domestic financial conditions in August, with equity markets taking the biggest blow, according to a report by Crisil.
The rating agency said that its Financial Conditions Index (FCI) declined to -0.5 in August from -0.4 in July. The FCI is a monthly indicator that combines parameters across the money, debt, equity and foreign exchange markets. A lower FCI value indicates financial conditions were tighter than the previous month, while a negative value implies it was tighter than the long-period average (measured since April 2010). That said, the FCI for August remains within thecomfort zone of one standard deviation. According to the rating agency, net outflows from foreign portfolio investments (FPIs) continued for the third straight month. Persistent FPI outflows and nervousness regarding the impact of tariffs led to a decline in equity market performance, with benchmark indices declining 2 per cent on a month-on-month basis. Persistent FPI (Foreign Portfolio Investment) outflows and nervousness regarding the impact of tariffs led to a decline in equity markets' performance, with benchmark indices declining 2 per cent on a month-on-month basis, the report added. FPI outflows also added pressure on the rupee, which reached an all-time low of 87.8 against the dollar in August and weakened 1.6 per cent on a monthly basis. Highlighting the stressed financial conditions, the report added that FPIs saw net outflows for the third straight month, driven by sharp outflows in the equity segment, while the debt segment saw increased net inflows. Equity market outflows were on account of the US tariff hike of 50 per cent on India in August. Net outflows in equity rose to USD 4 billion (vs USD 2.1 billion in July), the highest since January. FPIs net invested USD 1.5 billion compared to USD 0.9 billion in the debt market, a five-month high, driven by softening US yields and crude prices. The 10-year US Treasury yield fell 13basis points (bps) to 4.26 per cent average in August. According to Crisil, equity markets declined due to the impact of tariffs and continued foreign portfolio investor (FPI) outflows. On average, the S&P BSE Sensex and Nifty 50 dropped 2 per cent and 1.9 per cent month-on-month, respectively. However, Crisil noted that the proposed revision in GST rates, anticipated boost to consumption, and a long-term sovereign credit rating upgrade for India by S&P Global helped limit a steeper market decline. Increased FPI outflows led to the rupee depreciating 1.6 per cent on-month, averaging 87.5 per dollar. The currency hit an all-time low of 87.8 on August 29, the report added. Yield on the benchmark 10-year government security (G-sec) rose sharply, driven by investor concerns on the fiscal impact of the reduction in goods and services tax (GST) rates. Money market rates also rose mildly with moderating surplus liquidity. (ANI)
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