Any Further Interest Rate Hike to Push Corporates over Default Cliff - India Ratings

Mumbai, March 27, 2014: India Ratings & Research (Ind-Ra) believes if interest rates are increased further by 25bp-50bp in the next three to six months, the number of stressed corporates in BSE 500 will rise in the range of 14%-15%. The agency’s analysis of corporate performance till 9MFY14 suggests that 15% of the balance sheet debt of BSE 500 corporates is either approaching stress or already under financial stress. Another 25bp-50bp hike in interest rates may push this number to 16% of the balance sheet debt.
While margins in 9MFY14 were still lower than those in 9MFY13, the operating performance of BSE 500 corporates has shown no incremental qoq deterioration thus far in FY14. However, the recent stabilisation of operating performance is yet to be translated into stable credit metrics. Credit metrics continue to deteriorate, although at a much slower rate than during FY11-FY13. Ind-Ra attributes the continued deterioration to the higher interest rate transmission in the banking system from September 2013. Many private sector banks and some public sector banks have increased their base lending rates by 25bp-30bp post September 2013.
The agency believes that the argument over an immediate increase in interest rate, under the current conditions, is weak. Pressure on the Indian rupee has at least temporarily subsided. In fact, the attractiveness of rupee may have increased. The real interest rate may have increased from the 2012 level of 2.3% to reach closer to the 2008 level (4.28%). Also, a further immediate action to prop up the currency may not be required, given the controlled current account deficit and around USD297bn foreign currency reserves.
However, any interest rate hike in the next three to six months may wither even the signs of green shoots. This could act as a strong argument against any hike in interest rate at least till September 2014. Also, the interest rate transmission has improved, particularly, post August 2013 and one may wait for the effect of past interest rate hikes to play out.
Scenarios, though not in base case, exist where the interest rate may require to be hiked in the next 12-18 months. The last six general elections observed a spike in consumer inflation post elections. The popularly expected revival in industrial activity may inch up Wholesale Price Inflation, which will dent any improvement in the real interest rate. Also, the prospect of initiating the process of normalisation of interest rate in the US in 2015 may put pressure on emerging market currencies, including the India rupee, forcing action on interest rate front.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)