India's financial conditions worsened moderately in January 2020 primarily due to bad performance by the equity market, according to the ‘Financial Conditions Index’ (FCI) report by released ICICI Securities.

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According to the report, while other components of the FCI viz. forex market, aggregate demand market, and debt market also witnessed worsening conditions, the money market stood out as the only component of FCI to register easing conditions.

Overall, the Financial Conditions Index (FCI) fell moderately to 82 in January 2020 from 86 in December 2019.

Aggregate demand (AD) conditions worsened sharply during the month as the two indicators on which this index is based, M4 money supply and bank credit, both recorded slower growth.

“During the month, M4 money supply grew 10 percent, slightly down from average growth of 10.3 percent during the preceding months. Bank credit also slowed – during the month it grew just 7 percent sharply down from 8.7 percent growth registered in the previous six months,” the report said.

As a result, AD Index fell to -26 in January 2020 from -18 in December 2019.

Further, the report noted that Money Market conditions improved during the month, standing out as the only component of FCI to record easing conditions.

Call rate averaged 5.09 percent while CBLO (collateralized borrowing and lending obligation) rate averaged 4.76 percent during the month, comfortable below the repo rate of 5.15 percent.

“Overnight rates trading below policy rate indicate excess liquidity in the market. Interbank liquidity averaged Rs 3.5 trillion during January, a sharp jump from Rs 2.5 trillion in the previous month. Hence, excess interbank liquidity and below-repo overnight rates helped MM conditions to ease,” the report added.

Money Market Index improved to 37 in January 2020 from 29 in December 2019 and 4.5 in January 19.

However, the equity market recorded worsening conditions during the month due to a drop in forward PE and increasing volatility.

Although Nifty Index averaged 12,183 during Jan up from 12,097 in Dec, forward PE declined in line with earnings downgrade. However, the real blow seems to have come from rising volatility. India VIX and US VIX both increased during Jan, indicating global fears surrounding Coronavirus in China.

Equity Market Index fell to 71 in January 2020 from 100 in December 2019.

Debt market conditions also worsened during the month despite yields coming off. Yields at the short end of the curve (1-yr and 5-yr) inched up while yields at the longer end of the curve eased. Yields in the US also eased during the month, the report noted.

Driven by higher risk premia, Debt Market Index fell to 85 in January from 90 in December.

Meanwhile, the report said that the forex conditions worsened during January despite the rupee remaining flattish during the month.

Forex Index fell to 81 in January from 86 in December.