An RBI index of financial conditions? Good idea

A financial conditions index (FCI) could aid monetary policy. But such a tool can only be an input for human judgment and correlation must never be confused with causation

- 

The Reserve Bank of India's (RBI) latest Financial Stability Report presents an upbeat view of the country's financial system. Banks and non-bank financial companies are in good shape, says the report, adding that financial conditions have eased, supported by an accommodative monetary policy. The trouble, however, is that 'financial conditions' are notoriously hard to assess. This is no surprise, since they are the outcome of a complex mix of factors. At the same time, they have an enormous bearing on the overall health of the system and hence on financial stability. This is where a 'financial conditions index' (FCI) of the type proposed in RBI's monthly bulletin for June could help.