"The improvement shows reduction in cost of funds, comfortable liquidity position and better external financial linkages while economic activity is yet to pick up on quarterly basis," said the study on Financial Conditions Index (FCI) by the Confederation of Indian Industry (CII) and the Indian Banks' Association (IBA).
A strong rebound led to cost of funds index jump 58 per cent to 70.7 in the quarter under review (Q1) of 2016-17 from 44.8 in Q4 of 2015-16, funding liquidity index rose 47 per cent to 67.2 from 45.7 and external financial linkages index increased 52 per cent to 54.6 from 36 quarter ago.
"The Financial Conditions Index (FCI) at 61.1 implies a majority of the respondent banks and financial institutions reporting improvement," the report said.
Economic activity index, however, declined 20 per cent to 51.8 in last quarter from 64.6 in previous quarter.
A total of 41 major banks and financial institutions, with combined total assets of Rs 72 lakh crore, participated in the joint survey.
"The directional change in the FCI performance augurs well for the financial sector and the real sectors of the economy. We are certain that traversing the external headwinds, the government and the RBI would continue to focus on the twin objectives of maintaining financial stability and enhancing economic growth," said CII Director General Chandrajit Banerjee in the report.
Among the sub-indices, the cost of funds index improved maximum (70.7) in line with the expectations of the banks and financial institutions.
"Sustainable improvement in the financial conditions is a key imperative for strengthening the health of the Indian financial sector. With the gradual improvement in the overall macro-economic situation, financial conditions index is quite likely to witness upturn in coming quarters," said IBA chairman and Dena Bank Managing Director Ashwani Kumar.
Rise in the funding liquidity index to 67.2 signals a strong expectation of it improving further in subsequent quarters.
Similarly, increase in the external financial linkages index to 54.6 indicates that the Indian financial sector remained unperturbed from effects of the US Fed interest rate.
"The 20 per cent sequential decline in the economic activity index was due to the Consumer Price Index inflation, which banks and financial institutions expected it to deteriorate," the report said.
Majority of the banks and financial institutions, however, expected improvement in growth rate of real GDP over the previous quarter.
On annualised basis, the overall FCI declined 17.5 per cent to 61.1 in Q1 from 74.1 in same period year ago, as cost of funds index declined 14.8 per cent to 70.7 from 83, funding liquidity index 14.7 per cent to 67.2 from 78.8, external financial linkages index 16.5 per cent to 51.8 from 69.1 and economic activity index 25 per cent to 51.8 from 69 in like period year ago.
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