Interest Rate Hike Above 50bp to be Stressful for BSE 500 Corporates - India Ratings

Mumbai, December 17, 2013: India Ratings & Research (Ind-Ra) believes BSE 500 corporates, struggling with historically high leverage levels, may ill afford to handle any interest rate hike above 50bp. An interest rate increase of over 50bp, over the remaining FY14, may increase the number of stressed BSE 500 corporates to 13.1% from the current 9.5%. However, the amount of stressed debt may increase to 16.5% (of total balance sheet debt of BSE 500 corporates) from 10.9%, which could unleash a second wave of restructuring and non-performing assets.
An analysis of September 2013 results suggests that EBITDA and FFO margin deteriorated at a much slower rate than that observed from FY11 to FY13. The number of corporates with a coverage ratio of 1.2x or below increased marginally to 16.6% in 2HFY14 from 15.3% in FY13. The proportion of corporates in higher stress baskets (coverage ratio below 1.0x) improved to 11.4% in 2HFY14 from 12.2% in FY13. The sharp spike seen in these extreme stress baskets between FY11 (7.6%) and FY13 (12.9%) is for the first time showing signs of tentative moderation. To the extent the current interest rates and economic activity are maintained, defaults may be peaking out.
The agency has estimated the direct impact of an interest increase in the range of 50bp to 150bp over the next six to 12 months. The reason for such a range of interest rate hike is the somewhat low real interest rate that India may be facing now. Given the real interest rate condition, under situations of foreign currency stress, a 100bp to 200bp increase over a short time period cannot be completely ruled out. However, this is clearly not an Ind-Ra’s base case scenario.
As such, with the exception of the countries undertaking Unconventional Monetary Policy, India within the emerging market peers has among the lowest real interest rate, which is also lower than the pre-crisis (2008) level.  Given the trajectory of two driving factors of real interest rate, namely systemic lending rates and inflation, it is unlikely that real interest rate has meaningfully improved (if at all) during 2013.
Historically, Consumer Price Inflation does not usually show signs of moderation in the period leading to the general elections. Going back to the 10th Lok Sabha elections (held between May-June 1991) to the 15th Lok Sabha Elections (held between April-May 2009), it was only during the build-up period for the 13th Lok Sabha Elections (held in 1999) that elements of Consumer Price Inflation showed some moderation.
The likelihood of any moderation in inflation is low in the build-up to the elections. Therefore, any deterioration in real interest rate may be countered by propping up policy rate and hoping that the monetary transmission mechanism raises the systemic lending interest rate. Thus far in 2013, according to the median base rate of banks, lending rates may have remained broadly stable.
(Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)