Easing geopolitical tensions, lower oil prices improve India's macro indicators in June: Crisil

A stabilisation in geopolitical conditions and a decline in crude prices helped improve several of India's key macroeconomic indicators in June, according to a Crisil report. The easing of tensions followed the signing of a memorandum of understanding between the US and Iran during the month, which contributed to softer energy prices and improved investor sentiment.

The report noted that despite a stronger US dollar globally, the Indian rupee appreciated by 0.7% against the greenback in June, marking its first monthly gain in four months. The rupee averaged 95 per dollar during the month, compared with 95.6 in May.

Crisil attributed the appreciation to easing geopolitical tensions, lower crude oil prices, and a turnaround in foreign portfolio investor (FPI) flows. FPIs recorded net inflows of $0.5 billion in June, reversing a net outflow of $3.1 billion in May and marking the first net inflow in four months.

The inflows were aided by regulatory measures introduced by the government and the Reserve Bank of India (RBI) to attract foreign capital. These included expanding the pool of government securities eligible for FPI investment, easing participation norms for non-resident Indians (NRIs) and overseas citizens of India (OCIs) in equity markets, and measures aimed at lowering hedging costs.

Most of the foreign inflows were directed towards debt markets. Net FPI inflows into debt surged to $5.8 billion in June from $0.3 billion in the previous month. However, the equity segment continued to witness net outflows of $5.2 billion, higher than the $3.5 billion recorded in May. Crisil noted that investor sentiment improved in the latter half of the month, with FPIs turning net buyers in equities.

The benchmark 10-year government bond yield also softened during the month. The yield fell by 13 basis points on average to 6.90% and ended June at 6.76%, down 25 basis points from its May closing level. Lower oil prices and strong foreign inflows into debt securities contributed to the decline, although concerns over inflation, elevated US Treasury yields and fiscal risks limited further easing.

The report highlighted a strengthening in bank credit growth, which accelerated to 18.6% in June from 17.7% in May and 9.5% a year earlier. Sectoral data indicated that services and industrial lending were the primary drivers of the increase, with growth in services credit rising to 20.4% in May from 18.6% in April, while industrial credit growth increased to 17.5% from 15.1%.

Money market rates also eased during the month. Rates on six-month commercial papers and certificates of deposit declined, while the 91-day Treasury bill rate softened to 5.32% from 5.41% in May. Lending rates remained largely stable, with the one-year marginal cost of funds-based lending rate (MCLR) declining to 8.5% from 8.65% in May. Housing and auto loan rates were broadly unchanged.

A major factor supporting financial conditions was the sharp fall in crude oil prices. Brent crude averaged $85.4 per barrel in June, significantly lower than the previous month's average, and closed the month around $70 per barrel as concerns over supply disruptions eased.

Despite these improvements, equity markets remained under pressure on average during June. The Sensex and Nifty declined 0.4% and 0.6%, respectively, weighed down by FPI outflows from equities and concerns over economic growth. However, both indices recovered in the latter half of the month, supported by easing geopolitical tensions and lower oil prices, ending June higher on a month-end basis.

Crisil also noted a moderation in surplus liquidity within the banking system. The RBI absorbed an average ₹0.8 lakh crore in June, compared with ₹1.6 lakh crore in May, reflecting tighter liquidity conditions amid higher government cash balances and stronger credit growth.

The report warned that financial conditions could remain volatile. Crisil expects inflation to rise to 5.1% in FY27 from 2% in FY26, driven by higher energy and input costs as well as weather-related risks to food prices from a potentially below-normal monsoon and El Niño conditions.

Economic growth is also projected to moderate to 6.6% in FY27 from 7.7% in the previous fiscal amid rising input costs, softer global growth and weather-related challenges. In this backdrop, Crisil believes the RBI is likely to remain cautious and could consider a 25-basis-point rate hike in the second half of the fiscal year.

The report added that geopolitical uncertainties could continue to influence FPI flows and currency movements. While FPIs have recorded net inflows of $2.7 billion so far in July, the rupee has weakened beyond the 96-per-dollar mark, underscoring the volatility that could persist in financial markets through the remainder of the fiscal year.