A Crisil report suggested that its Financial Conditions Index (FCI) reflected improving domestic financial conditions on-month, with the gauge rising to -0.3 in October from -0.6 in September. A higher FCI value indicates easier financial conditions and vice versa. 

The growth was driven by the return of foreign portfolio investors (FPIs) to Indian markets after a four-month hiatus, as well as improved credit growth and a broadly stable rupee in October, which also contributed to a higher FCI value. 

Higher FPIs benefited both the equity and debt markets. FPIs were net-buyers for the first time in five months, net investing $4 billion, the highest FPI inflow in over a year. Debt market FPIs were supported by easing US yields. The debt segment led the inflows, with FPIs net-investing a seven-month high of $2.1 billion (vs $1.3 billion in the previous month), aided by a wider spread between Indian and US yields. Given the strong investments by FPIs in equities, domestic markets saw their highest monthly gains since May, with a robust inflow of $1.7 billion (vs outflows of $2.7 billion), supported by optimism over a trade deal between India and the US.

The Reserve Bank of India’s (RBI) proposed reforms to improve the credit flow in the economy by tweaking lending norms, including permitting banks to finance acquisitions, and easing regulatory norms for lending against listed debt securities and equity shares, also buoyed the equity markets. 

Bank credit growth rose to a 12-month high of 11.5% from 10.4% in September. The festive season, complemented with GST cuts, likely buoyed credit demand, while easing lending rates encouraged credit offtake. As per the sectoral data in the report, the strongest credit growth was seen in personal loans (11.7%) and services (10.2%) in September. Credit growth in agriculture rose to 9% at the end of the September quarter from 6.8% at the end of the June quarter. Industry also recorded a rise to 7.3% in the quarter under review from last year’s 5.5%. 

Easing lending rates in October was led by the lag in the impact of the RBI’s rate cuts between February and June. The one-year marginal cost of funds-based lending rate (MCLR) moderated to 8.55% from 8.6%. Auto loan rates also eased sharply by 15 bps on average to 9.03% while home loan rates were down 5 bps on average to 8.54%. 

Other reasons that contributed to the betterment of financial conditions in October

The S&P BSE Sensex and the Nifty 50 rose 2.2% each on average in October, driven by an improving domestic outlook, the proposed easing of lending regulations by the RBI and robust second-quarter earnings. The central bank also raised its GDP forecast to 6.8% from 6.5%. The NSE VIX, which gauges volatility in market sentiment, also eased down from 18 in May 2025 to 11.1 in October. 

The rupee was broadly stable against the dollar at 88.4 per dollar. Although the dollar strengthened during the month, FPI inflows and possible RBI intervention in the forex market supported the domestic currency.

The yield on the 10-year benchmark G-sec was broadly stable at 6.52% on average compared with 6.51% in September. Although lower crude oil prices and FPIs were supportive, lower liquidity amid huge bond issuances by states put pressure on the yield. Brent crude oil prices eased to $64.7 per barrel, 4.9% lower on-month and 14.6% lower on-year amid adequate supplies and fears of a global slowdown in growth. 

The primary drag factor

Dragging the FCI was moderating liquidity, driven by a pick-up in currency in circulation, given the festive season and the RBI’s likely dollar sales to protect the rupee from weakening. The systemic liquidity surplus continued to reduce in October for the third straight month, driven by an increase in the currency in circulation on account of the festive season and the RBI’s possible interventions in the forex market. The RBI net absorbed Rs 0.9 lakh crore (0.3% of net demand and time liabilities or NDTL) compared with Rs 1.5 lakh crore (0.6% of NDTL) in September. 

The 25-bps cut in the CRR prevented the liquidity surplus from narrowing further. As the liquidity surplus reduced, money market rates rose. The weighted average call money rate was up 4 bps on-month to 5.49%, but remained around the repo rate of 5.5%. Other rates, including those on the six-month commercial papers, were up by 7 bps to 6.74%, and the six-month certificates of deposit rose by 8 bps to 6.21%. 

Outlook for the rest of FY2026

“We expect the FCI to remain within the comfort zone for the rest of fiscal 2026, held up by the impact of the CRR cut and the expectations that the RBI will resume its rate-cutting cycle. The CRR cuts – 75 bps of which have already come into effect till November 10 – should cushion liquidity in the banking system amid rising currency and credit demand during the festive season. We believe soft inflation and risks to growth create grounds for another rate cut this fiscal,” the report stated. 

Despite expectations of an uptick in the second half, retail inflation is projected to remain soft, aided by low crude prices and the impact of goods and services tax rationalisation. In addition, adequate reservoir and groundwater levels bode well for the Rabi crop output. US tariffs and softer global growth are expected to hit India’s growth through exports, as the two countries are in the process of negotiating a trade deal, which could mitigate some of the impact if finalised soon. On the other hand, factors such as tax relief, rate cuts and soft food inflation are expected to give a leg up to private consumption. 

“That said, volatility in foreign capital flows and the rupee may put some pressure on financial conditions,” the report concluded.