India’s financial conditions tightened sharply in March 2026, with the CRISIL Financial Conditions Index (FCI) slipping to its lowest level since the COVID-19 pandemic, as global geopolitical tensions triggered significant market volatility. According to CRISIL’s latest monthly report, the FCI dropped to -1.5 in March from 0 in February, breaching its defined comfort band for the first time since May 2022.
The report highlighted that the escalation of the West Asia conflict had a widespread impact on India’s financial ecosystem, leading to foreign portfolio investor (FPI) outflows, a sharp depreciation in the rupee and rising bond yields.
“The West Asia conflict led to a significant tightening of India’s financial conditions in March,” CRISIL said, noting that domestic liquidity was also hit due to tax outflows.
The index has remained in negative territory for 10 of the past 12 months, but the latest reading marks the first instance in nearly four years where conditions have slipped outside the one standard deviation comfort zone.
A key driver of the tightening was a sharp reversal in foreign capital flows.
CRISIL reported that FPIs recorded their largest monthly net outflow since the pandemic, with March alone seeing net outflows of US$13.6bn (billion).
For the full fiscal year 2026, FPIs have net-sold $16.6 billion, a sharp contrast to net inflows of US$2.7bn in fiscal 2025, underscoring the scale of investor pullback.
These outflows exerted pressure across asset classes, including equities, debt markets and systemic liquidity.
The Indian rupee came under significant stress, depreciating by 2.2% in March, marking its steepest monthly decline since October 2022.
CRISIL attributed the fall to both capital outflows and a strengthening US dollar driven by safe-haven demand amid global uncertainty.
By the end of March, the rupee weakened to nearly 94.7 against the dollar, compared with about 91 at the end of February, reflecting heightened volatility in currency markets.
Equity markets also witnessed a sharp correction, with benchmark indices falling significantly during the month.
The S&P BSE Sensex dropped 8.4% while the NIFTY 50 declined 7.8% in March, marking the steepest monthly fall since the pandemic period, the report noted.
Market volatility surged in tandem, with the NSE VIX rising to 22.1, the highest level since May 2022.
The tightening financial conditions were further exacerbated by rising bond yields and surging crude oil prices.
The yield on the benchmark 10-year government security crossed 7% for the first time since July 2024, driven by fiscal concerns, higher oil prices and foreign investor outflows.
At the same time, Brent crude prices spiked to US$103.7/barrel in March, reflecting geopolitical risks and supply concerns.
While systemic liquidity remained in surplus on average, it moderated compared with February due to both global and domestic factors, CRISIL says.
The report noted that Reserve Bank of India (RBI) intervened through open market operations and regulatory measures to cushion the impact, including forex market controls and liquidity support.
These actions helped stabilise markets to some extent, even as financial conditions tightened, the reprot says.
Despite the financial market turbulence, CRISIL observed that the real economy indicators have so far shown limited impact.
“Financial markets have responded more to global market volatility than what the real sector indicators suggest so far,” the report says.
However, it cautioned that sustained high oil prices and prolonged geopolitical tensions could pose risks to growth, inflation and fiscal stability.
CRISIL warned that financial conditions could remain under pressure in the near term, particularly if the West Asia conflict persists.
The report stressed the need for policy agility and adequate buffers, noting that risks to inflation and growth remain elevated.
While India’s macroeconomic fundamentals and monetary policy stance provide some resilience, continued volatility in global markets and foreign capital flows could keep financial conditions tight in the coming months.
