Nov drop in Crisil FCI indicates tighter financial conditions in India

The FCI, however, remains within the comfort zone of one standard deviation from the long period average, Crisil Ratings said in a note.

Two factors tightened financial conditions in November: a reduction in net foreign portfolio investor (FPI) inflows and weakness in the rupee.

FPI inflows in November reduced sharply month-on-month (MoM). Flows into equity were dragged down by uncertainty, while debt saw the impact of hardening US yields.

A stronger dollar and lower FPI inflows pressured the Indian rupee.

A higher liquidity surplus and resultant softening in money market rates, and gains in equity markets capped the decline in the FCI.

In December, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) cut policy rates by 25 basis points (bps), a cumulative 125-bps cut so far. It also announced open market purchases of government securities and a $-₹ buy-sell swap—to improve domestic liquidity—towards the middle of the month. These steps should help keep financial conditions comfortable for the rest of this fiscal, Crisil Ratings noted.

The rating agency expects retail inflation to average 2.5 per cent in this fiscal compared with 4.6 per cent in the last. Though it expects an adverse base in food inflation to push up the headline number in the second half, low crude oil prices and goods and services tax relief will continue to keep inflation within the RBI’s tolerance band for the rest of this fiscal.

It expects India’s gross domestic product (GDP) growth to rise to 7 per cent this fiscal (FY26) compared with 6.5 per cent in the last. In the second half, it expects the growth to soften to 6.1 per cent from 8 per cent in the first half as the 50-per cent US tariff is likely to hit exports in the absence of a trade deal.

Support from the lower inflation and government capital expenditure will also decrease in the second half.

However, consumption is expected to remain healthy due to the lagged impact of the RBI’s rate cuts and tax relief.

Besides soft policy rates, financial conditions will get support from the RBI’s liquidity easing measures for the rest of this fiscal, it added.

ALCHEMPro News Desk (DS)