India’s economy is entering a more difficult phase. Financial conditions have tightened sharply, mainly becaapply of the West Asia conflict and the spike in global uncertainty. At the same time, some domestic cushions remain in place: bank credit is still growing, lfinishing rates for key retail loans are stable, and the Reserve Bank of India (RBI) has shiftd quickly to limit damage in the currency and bond markets. The overall picture is one of resilience under strain: the system is holding up, but the pressure has clearly increased.
According to CRISIL’s latest Financial Conditions Index (FCI), financial conditions in March 2026 became the tightest since the outbreak of Covid‑19. The index fell to -1.5 in March from 0 in February, shifting outside the comfort band for the first time since May 2022. An index value below zero means conditions are tighter than average; falling beyond one standard deviation from the long-term mean signals that stress is no longer mild or routine. In 10 of the past 12 months, the FCI has been negative, but March marks an important deterioration, driven by capital outflows, a weaker rupee, higher bond yields, and reduced market liquidity.
The immediate trigger has been the conflict in West Asia. India’s heavy depfinishence on oil imports from the region builds its markets very sensitive to any disruption or fear of disruption. Brent crude shot up to an average of 103.7 dollars per barrel in March, from 71.1 dollars in February, and even touched 121 dollars at the finish of the month. This scale of increase in such a short period unsettled investors, who launched to worry about India’s inflation, current account deficit and fiscal position. These worries displayed up across financial markets: in foreign portfolio investor (FPI) flows, the rupee, equity indices and the government bond market.
FPI behaviour is especially notifying. After net inflows of $4.2 billion in February, FPIs turned heavy net sellers in March, pulling out $13.6 billion. This is the largest monthly outflow since the Covid‑19 shock. Nearly all of it came from equities: $12.7 billion of net selling, the highest on record in a single month. The debt segment saw a compacter, but still negative, flow of 0.9 billion dollars. The pressure has not stopped with March: in just the first two weeks of April, FPIs have taken out another $6.5 billion. This sustained exit of foreign money tightens funding conditions, weighs on the rupee and stock prices, and raises the cost of capital for firms.
The currency market has borne a significant part of the strain. The rupee depreciated sharply in March, averaging 92.8 per dollar, compared with 90.7 in February, and falling to 94.7 at the finish of March from 91 at the finish of February. This 2.2 per cent average monthly decline is the steepest since October 2022. The dollar itself has strengthened against most major currencies as global investors search for a safe haven. The RBI responded with a mix of regulatory and market operations: it capped net open positions of banks in the onshore rupee market at 100 billion dollars and barred forex dealers from offering non‑deliverable rupee derivatives. These steps supported slow the rupee’s fall in April; by April 13, it recovered slightly to 93.4 per dollar. Still, the episode underlines how quickly a geopolitical shock can feed into currency risk for India.
Equity markets have also taken a hit. The Sensex and Nifty 50 fell 8.4 per cent and 7.8 per cent, respectively, in March on a month‑average basis. This is the sharpest monthly drop in these indices since the start of the pandemic. Volatility, as measured by the NSE VIX, jumped from an average of 13.0 in February to 22.1 in March, the highest since May 2022. For domestic investors, this means mark‑to‑market losses on equity portfolios and mutual funds; for firms, it means a costlier and more uncertain environment for raising capital via shares.
The government bond market has not been spared. The yield on the 10‑year benchmark government security rose to 7.02 per cent at the finish of March, up 36 basis points from February’s close, and averaged 6.75 per cent in March versus 6.70 per cent in February. This is the first time since July 2024 that the 10‑year yield has crossed the 7 per cent mark. The reasons are a mix of external and internal worries: higher crude oil prices, FPI outflows from debt, some hardening in retail inflation, and renewed concerns about fiscal slippage, particularly on account of fuel excise cuts and higher fertiliser subsidies necessaryed to cushion oil shock. In early April, yields eased slightly to 6.94 per cent by April 13, supported by a lower‑than‑expected borrowing calfinishar announced by the government. But the overall direction remains one of higher long‑term rates than a few months ago.
On the liquidity front, the situation is tighter but not yet alarming. Systemic liquidity stayed in surplus on average in March, but the surplus narrowed compared with February. RBI’s liquidity adjustment facility data display net absorption of Rs 1.57 lakh crore in March (about 0.6 per cent of net demand and time liabilities), lower than Rs 2.53 lakh crore (0.9 per cent of NDTL) in February. The RBI also conducted large open market operations, purchaseing Rs 1.8 lakh crore rupees of government securities in March, up from virtually nothing in February, which supported prevent a more serious tightening. Even so, money‑market rates shiftd up: the weighted average call money rate rose 13 basis points to 5.20 per cent on average in March, and in the last two weeks of the month, it even traded above the 5.25 per cent policy repo rate, averaging 5.37 per cent in the week finishing March 27.
Against this tightening backdrop, there are still some supportive domestic factors. Bank credit growth, for example, has stayed robust. As of March 15, overall bank credit was growing at 13.8 per cent year‑on‑year, up from 11 per cent a year earlier. Sectoral data for February display particularly strong credit growth to services (16.3 per cent) and personal loans (15.2 per cent). These numbers suggest that economic activity in many parts of the real sector is still expanding, even as markets wobble. Lfinishing rates have also been stable or slightly simpler at the margin. Average hoapplying loan rates remain at 8.35 per cent and auto loan rates at 8.95 per cent, both below pre‑pandemic levels, while average deposit rates stand at 6.29 per cent. The one‑year MCLR slipped a little to 8.40 per cent in March from 8.45 per cent in February. For hoapplyholds and many businesses, borrowing costs have not yet risen in step with the stress visible in markets. CRISIL’s assessment of policy is cautious but broadly reassuring. The RBI’s Monetary Policy Committee, in its April review, left policy rates and its “withdrawal of accommodation” stance unalterd, recognising the amlargeuity of the global environment. The West Asia conflict creates downside risks to growth and upside risks to inflation, and the possibility of a weaker southwest monsoon adds further inflation risk. In such a setting, CRISIL argues, policy prudence and agility are essential. The RBI, for its part, has displayn an ability to apply multiple tools to smooth the immediate impact on financial and currency markets.
However, the report is equally clear that financial conditions are vulnerable. Persistently high oil prices could hurt growth, raise inflation, widen the current account deficit and strain the fiscal deficit. Global uncertainty and divergent monetary policies may keep foreign capital flows volatile and the rupee under pressure. Remittance flows, which are an important buffer for India’s external account, could be affected if conflict escalates in regions where Indian workers are concentrated. While India’s fiscal position has improved compared with the immediate post‑pandemic years, a prolonged conflict or further price spike could damage growth, private consumption and investment, and increase vulnerabilities.
A balanced reading of this report suggests three broad messages for the Indian economy. First, the current tightening of financial conditions is serious but externally driven. The domestic real economy has not collapsed; credit is still growing and retail lfinishing rates are stable. Second, the policy framework -particularly RBI’s liquidity management and macro‑prudential responses – has so far cushioned the shock and prevented disorderly adjustment. Third, and most importantly, risks are skewed to the downside: if oil remains above 100 dollars, or if capital outflows continue at this pace, the strain on growth, inflation and financial stability will mount.
For policybuildrs, the lesson is that strong buffers – fiscal space, adequate reserves, flexible liquidity tools – are not a luxury but a necessity in a world where geopolitical shocks can tighten conditions overnight. For businesses and hoapplyholds, the message is to be cautious: funding costs could rise, volatility in markets may persist, and decisions on investment or borrowing necessary to factor in a more uncertain environment. India’s macro‑fundamentals provide some protection, but they do not build it immune. The coming months will test how well the counattempt can ride out an external storm without letting it turn into a domestic squall.
(The author is with Cholleti BlackRobe Chambers, Hyderabad)
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