Lower interest rates supportive, market volatility exerts pressure

• Crisil’s Financial Conditions Index (FCI) remained stable at -0.2 in April, unchanged from March. The FCI is a monthly gauge constructed based on parameters across money, debt, equity and foreign exchange markets, along with monetary policy and bank lending conditions
  
  
• A negative FCI value indicates tighter financial conditions compared to trend (or the long period average measured since April 2010). The FCI entered the negative zone in January but has remained within the stated comfort zone of one standard deviation from the long period average
  
  
• The impact of two consecutive rate cuts (in February and April) by the Reserve Bank of India’s (RBI) and surplus systemic liquidity led by increased government spending and open market operations, supported financial conditions in April, as they led to a sharp decline in broader interest rates across the economy. Several key rates stood below their pre-pandemic averages
  
  
• That said, three key factors kept the FCI in the negative zone. First, foreign portfolio investors (FPIs) turned net-sellers in April in the debt market, driven by increased uncertainty and a narrowing spread between United States (US) and Indian yields. Second, market volatility was high due to global market turbulence following the US announcement of reciprocal tariffs. Third, bank credit growth slowed to its weakest pace since March 2022
  
  
• External risks, mainly driven by uncertainty, remain elevated given the reciprocal tariffs the US would impose after three months. This has reduced the predictability about the US Federal Reserve’s (Fed) easing path, contributing to global market volatility. However, we believe the RBI’s rate cuts and ample foreign exchange reserves will support domestic financial conditions this fiscal