Why in News?
The Reserve Bank of India’s (RBI) June 2025 Financial Stability Report presents a positive outlook on India’s financial system, noting that financial conditions have eased, aided by accommodative monetary policy. However, assessing financial conditions remains complex due to the interplay of multiple variables.
What is the Financial Conditions Index (FCI)?
The RBI’s June bulletin proposed an experimental Financial Conditions Index (FCI) to better track the overall state of financial markets at high frequency. While not yet an official tool, it reflects RBI’s interest in building a composite gauge for financial market conditions.
Structure of the Proposed FCI
The proposed FCI includes 20 indicators from five key financial market segments:
- Money Market – tracks the spread of the weighted average call rate over the repo rate.
- Government Securities (G-Secs)
- Corporate Bond Market
- Foreign Exchange Market
- Equity Market – uses Sensex, though a broader index like Nifty may be more representative.
These segments are chosen for their direct link to monetary policy transmission and systemic stability.
Why FCI Matters
- An FCI can serve as a composite barometer of how financial markets are responding to economic conditions and policy changes.
- It could offer early warning signals on stress or overheating in financial markets.
- Particularly useful since monetary policy acts with time lags and markets can shift quickly.
