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Crisil Ratings in its latest report has said that financial conditions are going to tighten in the country over the next few months due to the likely increase in capital outflows, driven by rising external shocks, coupled with greater domestic vulnerability.

The agency said its Financial Conditions Index (FCI) dropped below the zero-mark in March 2022, indicating a deterioration in domestic financial conditions. In March, the financial conditions were not only tighter than the previous month but also relatively more stressed compared to the average conditions in the past decade. It noted that the country's vulnerability critically hinges on crude oil prices because they affect its major macroeconomic indicators, including the gross domestic product, inflation, current account deficit, rupee and, in some cases, fiscal deficit.

However, the report said measures to bring down the current account deficit and strengthen foreign exchange reserves will help the country to deal with any external shock. It also said so far, the RBI's accommodative policy has provided some cushion. However, rising inflation and external risks will make the central bank tighten its policy this fiscal. The RBI has already started the process of normalisation by restoring the LAF (Liquidity Adjustment Facility) policy corridor to its pre-pandemic width, and indicating withdrawal from accommodative stance in the coming months.