Domestic financial conditions to tighten in coming months: report

The country's vulnerability critically hinges on crude oil prices

Crisil's index provides a comprehensive monthly update on India's financial conditions by analysing 15 key parameters across equity, debt, money and forex markets along with policy and lending conditions.

In March, the financial conditions were not only tighter than the previous month but also relatively more stressed compared to the average conditions in the past decade, the agency said.

The country's vulnerability critically hinges on crude oil prices because they affect its major macroeconomic indicators, including the gross domestic product, inflation, current account deficit, rupee and, in some cases, fiscal deficit, it said.

The rating agency said so far, the RBI's accommodative policy has provided some cushion. However, rising inflation and external risks will make the central bank tighten its policy this fiscal.

The RBI has already started the process of normalisation by restoring the LAF (Liquidity Adjustment Facility) policy corridor to its pre-pandemic width, and indicating withdrawal from accommodative stance in the coming months.

"Given the shifting stance, we believe the RBI will hike repo rate by 50-75 bps over this fiscal, which will transmit to market rates and tighten financial conditions," it said.

The rating agency said banks have already started raising their Marginal Cost of Fund-based Lending Rate (MCLR) after RBI's April monetary policy, indicating a return of the rate hike cycle.