Why in NEWS
The Reserve Bank of India has proposed a daily-frequency Financial Conditions Index (FCI) to assess India’s financial market conditions in real-time for better policy and investment decisions.
Key Concepts and Terms
| Term | Explanation |
|---|---|
| FCI (Financial Conditions Index) | A composite indicator that tracks tightness or ease in financial markets. |
| Taper Tantrum | A sudden rise in interest rates due to fears of central bank reducing bond purchases. |
| Liquidity Measures | Central bank actions to inject money into the financial system. |
| Standardised FCI | Index scaled to historical average (since 2012); positive = tight, negative = easy. |
| Quantitative Easing | Central bank policy of purchasing assets to inject liquidity into the economy. |
Key Features of RBI’s Proposed FCI
| Aspect | Details |
|---|---|
| Frequency | Daily |
| Time Frame Reference | Deviations measured from historical average since 2012 |
| No. of Indicators | 20 financial indicators |
| Markets Covered | Money markets, G-Secs, corporate bonds, equity, and forex |
| Interpretation | Positive = tighter financial conditions, Negative = easier financial conditions |
| Historical Peaks | Tightest: July 2013 (FCI = 2.826, taper tantrum) |
| Easiest: June 2021 (FCI = -2.197, post-Covid liquidity surge) |
Significance of FCI
| Impact Area | Details |
|---|---|
| Real-Time Monitoring | Enables faster policy response to financial market stress or overheating |
| Macro-Financial Research | Boosts domestic capability in financial analytics |
| Investor Insights | Helps analysts assess financial environment for business and investment planning |
| Policy Calibration | Assists RBI and government in adjusting interest rates, liquidity, and fiscal support accurately |
In a Nutshell
Mnemonic: FAST-FI
F – FCI tracks financial tightness/ease
A – Assesses 20 indicators daily
S – Standardised for trends since 2012
T – Taper tantrum highlighted stress peak
F – Forex, equity, bonds included
I – India’s own real-time policy tool
Prelims Questions
- What does a positive value in RBI’s Financial Conditions Index (FCI) indicate?
a) Liquidity surplus
b) Easier financial conditions
c) Tighter financial conditions
d) Stable macroeconomic environment - Which of the following was identified as the tightest period in India’s financial market according to the proposed FCI?
a) March 2020
b) June 2021
c) July 2013
d) May 2014 - Which markets are NOT covered under the RBI’s proposed Financial Conditions Index (FCI)?
a) Forex market
b) Real estate market
c) Corporate bond market
d) Government securities market
Prelims Answer Key
| Q | Answer | Explanation |
|---|---|---|
| 1 | c | Positive FCI values indicate tighter financial conditions. |
| 2 | c | July 2013 (taper tantrum) saw highest FCI value at 2.826. |
| 3 | b | Real estate market is not part of the proposed FCI components. |
