Financial conditions run into triple headwinds

Crisil’s Financial Conditions Index (FCI) declined to -0.5 in June from 0.0 in May. FCI is a monthly indicator that combines parameters across the money, debt, equity and foreign exchange markets.

A lower FCI value indicates financial conditions were tighter than the previous month, while a negative value implies tighter than the long period average (measured since April 2010). The FCI has been negative in five of the last six months. However, it remained within the stated comfort zone of one standard deviation.

• The three reasons for the negative FCI value in June were foreign portfolio investor (FPI) outflows, higher crude oil prices and a depreciating rupee
  
  • While the equity segment saw lower inflows, overall FPIs were net sellers given debt outflows as US yields remained high amid concerns regarding inflation and debt in the US
  • Global uncertainties led to a surge in crude oil prices which hit $80 per barrel in June for the first time since January 2025. This put pressure on yields, equity markets and the rupee
  • The rupee depreciated 0.8% on-month after three consecutive months of gaining against the dollar
• On the other hand, actions of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) helped cushion financial conditions. The 100 basis points (bps) of rate cuts since February, including a sharper-thanexpected 50 bps in June, and surplus systemic liquidity in the past three months (April-June) have led to easing of broader interest rates.
• In our view, softening inflation will allow the MPC to cut the repo rate once again this fiscal. We expect one more rate cut this fiscal followed by a pause. However, global uncertainties could continue to impart volatility to capital flows and currency movements.