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A further hike in interest rates by 25 to 50 basis points (bps) in the next three to six months will lead to the number of stressed corporates in the BSE 500 rising in the range of 14–15 per cent, according to India Ratings & Research.
The agency’s analysis of corporate performance till 9MFY14 suggests that 15 per cent of the balance sheet debt of BSE 500 corporates is either approaching stress or already under financial stress. “Another 25-50 bps hike in interest rates may push this number up to 16 per cent of the balance sheet debt,” India Ratings said in a report.
It observed that while margins in 9MFY14 were still lower than those in 9MFY13, the operating performance of the corporates has shown no incremental sequential deterioration in FY14 so far.
Credit metrics continue to deteriorate, although at a much slower rate than in FY11-FY13. It 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 25–30 bps post-September 2013.
“An immediate increase in interest rates under the current conditions is weak. Pressure on the Indian rupee has at least temporarily subsided…The real interest rate may have increased from the 2012 level of 2.3 per cent to reach closer to the 2008 level (4.28 per cent).
“Also, further immediate action to prop up the currency may not be required, given the controlled current account deficit and around $297 billion in foreign currency reserves,” the report said.
However, any interest rate hike in the next three-six months may wither even signs of green shoots. This could act as a strong argument against any hike in interest rates 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, it further said.
Nevertheless, an interest rate hike may be required 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 push 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 rates in the US in 2015 may put pressure on emerging market currencies, including the India rupee, forcing action on the interest rate front.
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