RBI policy flexibility likely as GDP growth seen slowing to 6.6% in current fiscal: Crisil

India's financial conditions saw a notable improvement in July, primarily fueled by a surge in foreign portfolio investor (FPI) inflows, reaching USD 4.2 billion – the highest since September 2024. The equity segment experienced its first net inflow in five months, reversing a trend of outflows.

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growth is expected to slow in the coming quarters. Heightened cost pressures on producers, a challenging global environment for exports and risks to agriculture from a below-normal monsoon and likely El Nino conditions, will weigh on growth.

This positive financial momentum was further supported by a widening systemic liquidity surplus, robust bank credit growth, and a dip in the 10-year government security yield. Money market rates softened as liquidity increased, attributed to FPI inflows, foreign currency deposits, and seasonal easing in currency circulation.

However, the Indian rupee faced headwinds, depreciating by approximately 11% year-on-year against the US dollar in July. This weakness was attributed to a stronger greenback and rising crude oil prices, impacting market sentiment.

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We expect gross domestic product growth at 6.6% this fiscal compared with 7.7% in the last fiscal.

Looking ahead, economic growth is expected to moderate to 6.6% in the current fiscal year, a slowdown from the previous year's 7.7%. Factors such as increased cost pressures for producers, a challenging global export environment, and potential risks to agriculture from an unfavorable monsoon and El Nino conditions are anticipated to weigh on growth. The ongoing West Asia conflict remains a key risk, potentially causing volatility in capital flows, the rupee, and oil prices.

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Developments pertaining to the West Asia conflict remain the key risk for financial conditions this fiscal, as they can lead to volatility in capital flows, the rupee and oil prices.