Revival of foreign investor interest supports India’s financial conditions

Domestic financial conditions remained stable in May relative to the previous month, CRISIL’s Financial Conditions Index (FCI) shows. The index value was 0.3, unchanged from the previous month, but higher than the average of -0.1 seen in the March quarter. A higher value of the index indicates easier financial conditons. CRISIL’s FCI is a monthly tracker that combines 15 key parameters across equity, debt, money and forex markets along with policy and lending conditions.

• In May, foreign portfolio investor (FPI) inflows to India surged to a nine-month high, even as global cues were volatile. Capital inflows to both equity and debt markets increased, boosting returns in these segments.
• Domestic interest rates have stabilised after the Reserve Bank of India (RBI) paused rate hikes in April. A steady deceleration in inflation eased expectations of further monetary tightening.
• Yet, most interest rates have stabilised at levels higher than the pre-pandemic five-year (fiscal 2016 to fiscal 2020) average. Moreover, rates are increasing in real terms, with softening inflation.
• Although overall bank credit growth remains strong, certain segments under industry and personal loans experienced a moderation amid rising interest rates. Rates at current levels are expected to temper demand in the economy in the coming months.
• We expect the RBI’s Monetary Policy Committee (MPC) to maintain status quo on policy rates in the August meeting, as it evaluates the impact of past rate hikes on growth and inflation. We expect it to initiate rate cuts in the last quarter of this fiscal as growth slows and exerts downside pressure on inflation.