India's financial conditions remained under significant strain in April, driven by elevated crude oil prices, sustained foreign investor outflows, and a weakening rupee, according to a report by Crisil. The Middle East conflict exacerbated these pressures across markets.
Crisil Financial Conditions Index
The Crisil Financial Conditions Index (FCI) stood at -1.2 in April, an improvement from -1.4 in March. However, the report emphasized that a negative FCI value outside the comfort band of one standard deviation indicates financial conditions are considerably tighter than the long-period average.
Foreign Portfolio Investor Outflows
The Middle East crisis continued to negatively impact foreign portfolio investor (FPI) inflows, the rupee, and government bond yields. FPIs withdrew a net $7.6 billion from Indian markets in April, driven by surging crude prices and geopolitical uncertainty. Equity markets saw net outflows of $6.5 billion, while debt outflows reached $1.2 billion. Although lower than March's $13.6 billion total outflow, April's FPI withdrawals were significantly above the 12-month average of $1.4 billion.
Rupee Depreciation and Bond Yields
Capital outflows and rising crude prices pushed the rupee to fresh record lows. The rupee's average value weakened to 93.6 per US dollar in April from 92.8 in March, crossing the 95-per-dollar mark for the first time by month-end. The Reserve Bank of India's measures, such as capping banks' net open rupee positions, helped mitigate further depreciation.
Government bond markets also faced pressure, with the 10-year benchmark G-sec yield rising sharply to an average of 6.96% in April from 6.75% in March. This was driven by fiscal and inflation concerns stemming from the West Asia conflict, rising FPI outflows, and surging crude oil prices.
Crude Oil Prices
One of the biggest concerns highlighted by Crisil was crude oil. Brent crude averaged $120.4 per barrel in April, the highest monthly average in over a decade, registering a 16.1% increase over March. Crisil warned that financial conditions are likely to remain tight even if geopolitical tensions ease, with lingering effects keeping crude prices high for the rest of the year. The agency expects crude to average $90-95 per barrel during the current fiscal year.
Impact on Inflation and Growth
The report cautioned that persistently high oil prices could worsen India's growth-inflation balance by impacting inflation, fiscal deficit, current account deficit, and overall economic growth. Crisil projected retail inflation to rise to 5.1% this fiscal, compared to 2% last fiscal, citing higher commodity prices and expectations of a below-normal monsoon. GDP growth is expected to slow to 6.6% from 7.6% last fiscal due to higher input costs, weaker global growth, and elevated inflationary pressures.
Supportive Domestic Trends
Despite the stress, Crisil identified some supportive domestic trends. Bank credit growth remained strong at 16% in April, while systemic liquidity surplus touched a four-year high of Rs 5 lakh crore amid higher government spending and bond maturities. Equity markets witnessed mild gains during the month as investor sentiment improved intermittently on expectations of de-escalation in geopolitical tensions and periodic softness in crude oil prices.
