FPI inflows, easing interest rates bring relief

• Crisil’s Financial Conditions Index (FCI) improved to 0.1 in May from -0.2 in the previous month, entering the positive zone after four consecutive months of negative readings. A higher FCI value suggests an improvement in financial conditions, and a value above zero indicates easier financial conditions than the long period average (measured since April 2010).

• The improvement in financial conditions in May can be attributed to a higher surplus in systemic liquidity and increased foreign portfolio investor (FPI) inflows. The surplus in systemic liquidity enabled the continued transmission of the Reserve Bank of India’s (RBI) previous rate cuts, resulting in several key interest rates falling below their pre-pandemic five-year averages

• FPIs were net-buyers in Indian markets in May, driving the equity market to its highest level since December 2024. Investor sentiment was boosted by signs of progress on a bilateral trade agreement (BTA) between India and the United States (US), as well as lower domestic inflation, which sparked hopes of rate cuts. India and US announced the Terms of Reference for the BTA on April 21, 2025, post which both sides have been engaged in negotiations. The initial phase of discussions i.e. the first tranche of the BTA is targeted to be completed by fall 2025

• In June, the RBI’s Monetary Policy Committee (MPC) front-loaded monetary easing with a steeper-than-expected rate cut of 50 basis points (bps), reducing the repo rate to 5.5%. The MPC also cut the cash reserve ratio (CRR) by 100 bps, which will proceed in four tranches between September and November 2025. These moves are expected to ramp up transmission of monetary easing to broader interest rates and support financial conditions this fiscal