India’s financial conditions in comfort zone despite FPI outflows: Crisil

Domestic financial conditions in India are in the comfort zone despite foreign portfolio investor (FPI) outflows, according to a Crisil report on Friday.

After record-high FPI inflows in September, October logged the highest post-pandemic outflows.

“Yet, this did not significantly drag India’s financial conditions,” showed Crisil’s Financial Conditions Index (FCI).

The FCI -- which is a combination of parameters from India’s major market segments along with policy and lending conditions – moderated to 0.1 in October compared with 1.2 in the previous month.

“However, the FCI value remained positive, implying easier conditions than the long-term average,” the report mentioned.

FPI outflows primarily hit the equity markets. The pressure on domestic interest rates was limited, as it was offset by easier domestic monetary conditions.

Additionally, stable crude prices supported the Indian financial markets. The rupee depreciated at a moderate pace during the month

“That said, the lagged impact of the RBI’s past rate hikes is gradually being felt in the broader economy. Bank credit growth has been slowing in the past three months, including for personal loans. This is likely to impact consumption, especially in urban areas,” the report mentioned.

Short-term capital flows to India from FPIs have been highly volatile.

The RBI changed its stance to ‘neutral’ in October, while systemic liquidity conditions improved. Additionally, stable crude prices supported the Indian financial markets. The rupee depreciated at a moderate pace during the month.

“The RBI may like to get clarity on how these risks will play out, before going in for a rate cut. Overall, we expect one rate cut by the RBI this fiscal,” said the report.

FPIs turned net sellers in October, withdrawing $11.5 billion (in equity, debt and hybrid categories) compared to an inflow of $11.2 billion in September.

The equity market saw a record-high net outflow of $11.2 billion (vs an inflow of $6.9 billion in the previous month) in response to the rise in Chinese equities following the announcement of aggressive fiscal stimulus measures.