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Crisil anticipates another rate cut this fiscal amid softer inflation and downside risks to growth, before a pause. The RBI’s MPC cut the repo rate by 50 basis points in June policy review to support growth amid benign inflation prospects.
The rating agency expects Consumer Price Index (CPI) inflation to remain under control this fiscal, as the India Meteorological Department’s forecast of an above-normal monsoon should support healthy kharif production and keep food inflation low.
International commodity prices, too, are expected to remain benign, helping curtail non-food inflation.
“We forecast India’s gross domestic product (GDP) to grow 6.5% this fiscal, with risks tilted to the downside due to US tariff hikes,” Crisil said, adding that the support to domestic growth will come from the RBI’s rate cuts, a healthy monsoon, soft crude oil prices, income-tax reductions and low food inflation.
Crisil’s Financial Conditions Index (FCI) improved to 0.1 in May from -0.2 in the previous month, entering the positive zone after four consecutive months of negative readings. A higher FCI value suggests an improvement in financial conditions, and a value above zero indicates easier financial conditions than the long-period average.
Crisil highlighted softening credit growth and market volatility as factors that were a drag on the economy. Bank credit growth moderated to 9.8% on-year in May versus 10.3% in the previous month, its slowest pace since March 2022. The sectoral data for April indicated credit growth slowed in industry (6.6% vs 7.8% in March), agriculture (9.2% vs 10.4%) and services (10.5% vs 12.4%). The NSE volatility index (VIX) averaged a 12-month high of 18 in May (versus 16.8 in the previous month and the 12- month average of 15.1), indicating higher market volatility.
Crisil said the improvement in financial conditions in May can be attributed to a higher surplus in systemic liquidity and increased foreign portfolio investor (FPI) inflows. The surplus in systemic liquidity enabled the continued transmission of the Reserve Bank of India’s (RBI) previous rate cuts, resulting in several key interest rates falling below their pre-pandemic five-year averages.
FPIs were net buyers in Indian markets in May, driving the equity market to its highest level since December 2024. "Investor sentiment was boosted by signs of progress on a bilateral trade agreement (BTA) between India and the United States (US), as well as lower domestic inflation, which sparked hopes of rate cuts. India and the US announced the Terms of Reference for the BTA on April 21, 2025, post which both sides have been engaged in negotiations. The initial phase of discussions i.e. the first tranche of the BTA is targeted to be completed by fall 2025," said Crisil.
In June, the RBI’s Monetary Policy Committee (MPC) front-loaded monetary easing with a steeper-than-expected rate cut of 50 basis points, reducing the repo rate to 5.5%. The MPC also cut the cash reserve ratio (CRR) by 100 bps, which will proceed in four tranches between September and November 2025. These moves are expected to ramp up transmission of monetary easing to broader interest rates and support financial conditions this fiscal, said Crisil.
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