West Asia Conflict Keeps India's Financial Conditions Under Stress As Inflation Edges Up: Crisil Intelligence

New Delhi, May 16 (KNN) India's retail inflation rose marginally to 3.48 per cent in April 2026 from 3.40 per cent in March, while financial conditions remained significantly tighter than historical averages, according to a Crisil Intelligence report. 

The ongoing West Asia conflict — now past 74 days — is emerging as the dominant risk to India's macroeconomic outlook for the remainder of the fiscal year.

Inflation: Mild Rise, Growing Risks Ahead

Food inflation edged up to 4.2 per cent from 3.9 per cent, driven by elevated vegetable oil prices — with the FAO Vegetable Oil Price Index touching its highest level since July 2022 — as well as rising costs in fish and seafood, fruits, and ready-made foods. Tomato inflation remained high at 35.3 per cent, though onion and potato continued to see deflation on the back of strong domestic supplies.

Fuel inflation eased to 0.7 per cent from 1.7 per cent, aided by base effects in electricity and LPG. Petrol and diesel pump prices have been kept unchanged by the government, shielding most consumers for now. 

Core inflation held steady at 3.7 per cent for the fourth consecutive month, though restaurant and accommodation services saw a notable pick-up to 4.2 per cent from 2.9 per cent, driven by higher commercial LPG costs being passed through to consumers.

Crisil projects Consumer Price Index (CPI) inflation to average 5.1 per cent in FY2027, sharply higher than the 2.0 per cent recorded in FY2026, driven by a low base, an expected below-normal monsoon amid El Niño conditions, and rising energy and input costs yet to fully pass through to consumers.

Financial Conditions: Tight but Marginally Improved

The Crisil Financial Conditions Index (FCI) stood at -1.2 in April, a slight improvement from -1.4 in March, but still well outside the comfort band, indicating financial conditions remain significantly tighter than the long-period average. 

The West Asia conflict continued to weigh on foreign portfolio investor sentiment, the rupee, and government bond yields simultaneously.

Foreign portfolio investor (FPI) outflows stood at USD 7.6 billion in April — lower than the USD 13.6 billion recorded in March but well above the 12-month average outflow of USD 1.4 billion. Equity markets saw net outflows of USD 6.5 billion, while debt market outflows rose to USD 1.2 billion.

The rupee touched an all-time low of 95 per dollar by end-April, with its monthly average at 93.6 per dollar. The RBI introduced a cap on banks' net open rupee positions in the onshore deliverable market at USD 100 million to limit further depreciation. 

The 10-year government securities yield averaged 6.96 per cent in April, up around 20 basis points from March, with the term premium over the repo rate reaching its highest monthly average since September 2022.

Crude oil prices surged to a decade-high monthly average of USD 120.4 per barrel in April, registering a 16.1 per cent month-on-month increase. Crisil expects crude to average USD 90–95 per barrel for FY2027 as a whole.

Supportive Domestic Factors

Not all indicators were negative. Bank credit growth remained robust at 16 per cent in April, with services leading sectoral growth at 19 per cent. 

Systemic liquidity surplus reached a four-year high of Rs 5 lakh crore in mid-April, driven by government spending and G-sec maturities, contributing to easing money market rates. Benchmark equity indices posted modest average gains of around 1 per cent during the month, supported by intermittent expectations of geopolitical de-escalation.

Outlook

Crisil expects GDP growth to moderate to 6.6 per cent in FY2027 from 7.6 per cent in FY2026, weighed down by elevated commodity prices, an unfavourable monsoon, softer global growth, and rising inflation. 

(KNN Bureau)