Financial conditions ease but headwinds remain

After tightening dramatically in March following the outbreak of the coronavirus, our proprietary index shows that financial conditions in India have eased substantially over the past couple of months. This is in large part due to the RBI’s swift and emphatic response. Policy rates have been slashed to record lows, while large-scale liquidity injections have been unveiled. Looking ahead, we think the central bank will keep monetary policy very accommodative for the foreseeable future, which should ensure that financial conditions remain loose. That will help prevent a more severe economic downturn from materialising this year. Nevertheless, India’s failure to control the spread of the virus, as well as the government’s underwhelming support package for households and corporates, means that the economy is still set to suffer a slower and more fitful recovery from the nationwide lockdown than many other countries in Asia.