Crisil Ratings in a report has said that the spike in crude oil prices after geopolitical tensions and a delay in rate cuts by the US Federal Reserve (Fed), dimming global investor sentiment affected the Indian markets during the month.
“As a result, foreign portfolio investors (FPIs) turned net sellers, which hit the rupee and domestic bond yields,” the rating agency stated. Domestically, improving liquidity conditions provided relief. But the lagged impact of the Reserve Bank of India’s (RBI) past monetary tightening has been affecting the credit growth with banks seeing a slowdown in credit offtake for the second consecutive month in April.
Lending rates are also catching up in segments where transmission of the RBI’s rate hikes had been slower so far in the cycle. The report added that the spectre of a higher-for-longer policy on interest rates looms on financial conditions this year. S&P Global does not expect the Fed to cut rates before December, as US inflation stays stubbornly high. This can constrain space for monetary easing by the RBI as well, which will also factor in risks from weather that domestic inflation faces.
"Geopolitical tensions remain elevated and a risk for crude prices. All these mean little space for significant easing of financial conditions this fiscal," as per the Crisil.
What Led To Tighter Financial Conditions
The agency mentioned that global crude oil prices continued to rise in April as geopolitical tensions escalated. Brent crude oil prices surged 5.4 per cent per month to an average of USD 90.1 per barrel. The yield on the ten-year US Treasury bond note rose sharply to 4.54 per cent on average from 4.21 per cent in March. “Expectations that interest rates will remain higher for longer (due to higher-than-expected inflation and a strong job market) and the rise in global crude oil prices pushed up the US yields,” the Crisil report stated.
Also, foreign portfolio investors turned net sellers in April. India saw USD 1.9 billion of net foreign portfolio investment (FPI) outflows during the month compared with a strong inflow of USD 6.3 billion in March. Both the equity and debt markets saw net outflows. From equities, foreign investors withdrew USD 1 billion (vs net investment of USD 4.2 billion in March). After 12 straight months of net inflows, the debt segment saw USD 1.3 billion in net outflows (vs an inflow of USD 1.6 billion in March). The outflows were driven by a narrower spread between US treasury yields and Indian G-sec yields.
The rupee depreciated against the dollar owing to the strengthening of the dollar index (105.4 from 103.6) and FPI outflows. The rupee averaged 83.4 per dollar, down from Rs 83 per dollar in March.
In April, bank credit growth was the slowest since October 2023 — 15.3 per cent. In March, the growth was higher at 16.3 per cent. Sectoral data for March indicates that credit growth in services (20.2 per cent vs 21.2 per cent in February) and personal loans (17.7 per cent vs 18.1 per cent) tempered during the month. A moderation in growth in credit cards (25.6 per cent vs 31 per cent) and the other personal loans category (18.7 per cent vs 19.7 per cent) slowed the growth in personal loans. Credit growth in the industry (8.5 per cent vs 8.6 per cent) and agriculture (20.1 per cent) segments was broadly unchanged.
Bank lending rates remained at their pre-pandemic average with some rates rising marginally in April. The rate on auto loans rose 1 bp to 9.78 per cent and that on home loans 4 bps to 9.35 per cent, while the one-year marginal cost of funds-based lending rate (MCLR) was steady at 8.8 per cent. Compared with the 250-bps hike in the repo rate in the current cycle, transmission is almost complete in the housing loan segment (237 bps) while it lags for the one-year MCLR (155 bps) and auto loan rate (156 bps).