New Delhi [India], August 14 : Reserve Bank of India's (RBI) may remain flexible on policy rates in the next Monetary Policy Committee (MPC) meet as growth is expected to slow down in the coming quarters with GDP likely to be at 6.6 per cent this fiscal, according to a Crisil report.
The report highlighted an improvement in India's financial conditions in July, driven mainly by higher net FPI inflows of USD 4.2 billion--the highest since September 2024--with the equity segment recording its first net inflow in five months.
"Net FPI inflow surged to USD 4.2 billion in July vs USD 0.5 billion in June," it said adding India's equity segment posted a net inflow of USD 2.1 billion compared with the net outflow of USD 5.2 billion, reversing its five-month trend of net outflows.
Furthermore, "The benchmark S&P BSE Sensex and NSE Nifty 50 rose 2.3% (vs -0.4%) and 1.9% (vs -0.6%), respectively," Crisil noted.
Additionally, several additional factors supported the growth including widening systemic liquidity surplus, strong bank credit growth, softer 10-year G-sec yield, as per the report.
"Money market rates softened as the systemic liquidity surplus widened on account of the FPI inflows, foreign currency non-resident (bank) [FCNR (B)] deposits and seasonal easing in currency in circulation," it added.
Systemic liquidity surplus widened in July, with the apex bank absorbing an average of Rs 1.07 lakh crore, or 0.4 per cent of net demand and time liabilities (NDTL), compared with Rs 0.78 lakh crore, or 0.3 per cent of NDTL, in June.
The increase was mainly driven by FPI inflows, FCNR(B) deposits and easing currency in circulation. Money market rates also softened, with six-month CD and CP rates averaging 6.90 per cent and 7.33 per cent, respectively, compared with 7.25 per cent and 7.64 per cent in June.
At the same time, "Bank credit growth remained strong at 17.7%1," and "The yield on the benchmark 10-year bond fell 12 bps 6.77% in July."
However, weakness in the rupee dragged the market dipping 0.9% against the United States (US) dollar to average 95.8 in July due to a stronger greenback and the upward trajectory in crude oil prices. "The rupee depreciated ~11% on-year in July and ended the month at 95.4," it noted.
Overall, Crisil expects MPC to to be flexible on policy rates. It flagged, "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."
"We expect gross domestic product growth at 6.6% this fiscal compared with 7.7% in the last fiscal," it said, stressing, "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."