Foreign fund inflow and improving liquidity conditions lend support

• Financial conditions eased for second consecutive month in March. CRISIL’s Financial Conditions Index (FCI) improved 40 basis points to 1.0 in March, reaching the highest level since August 2023. A higher FCI value indicates easier financial conditions, and vice versa.
• Foreign capital inflow almost doubled relative to the previous month, benefitting both equity and debt markets. India’s strong growth and the imminent inclusion in two emerging market bond indices this fiscal have been drawing foreign investors.
• Liquidity conditions improved this month, easing the debt- and money-market rates.
• While bank credit growth was strong, there were signs of moderation in certain segments, due to the impact of the RBI’s regulatory measures, such as those for credit to NBFCs and personal loans. Its impact could continue percolating to the broader economy in the current fiscal.
• On average, financial conditions were easier in fiscal 2024, with FCI increasing to 0.6 in fiscal 2024 from -0.4 previous year. Foreign portfolio investors (FPIs) played a key role in supporting the domestic financial markets. Bank credit growth was higher in fiscal 2024, despite tighter liquidity.
• The current fiscal begins with unchanged repo rates by the RBI. Globally, major central banks are currently cautious about cutting rates, amid slower disinflation and strong growth. On the domestic front, while the forecast of an above-normal monsoon bodes well for disinflation, freak weather events and crude oil prices are the lurking risks. Government bond yields have firmed up as markets price in delay in rate cuts from RBI. ‘Higher for longer’ interest rates and the RBI’s regulatory measures could weigh on financial conditions over the next few months.