The recently unveiled credit ratio data for the April-September 2023 period sheds light on a narrative of moderation amid the backdrop of global challenges. This metric, which quantifies the ratio of upgrades to downgrades during a specific timeframe, exhibited a notable shift when compared to the preceding period. Specifically, the credit ratio moderated to 1.67 from its previous standing of 2.72, a development that was largely in line with expectations.

The financial sector’s commendable performance is noteworthy, boasting the highest credit ratio at 4.2. This sector’s success story was propelled by a substantial increase in both banks and non-banking financial companies (NBFCs) recording upgrades. This upward trend can be attributed to consistent improvements in asset quality and capital infusion. However, it is worth noting that recent apprehensions expressed by the RBI regarding the mounting volume of unsecured personal loans on banks’ balance sheets warrant close observation. The potential ripple effect should banks opt to curtail lending in this segment is particularly significant.

The infrastructure sector retained its robust stance, maintaining a credit ratio of 2.21. A significant portion of upgrades in this sector was attributed to the successful commissioning of projects in the realms of road infrastructure and renewable energy. This positive trajectory is likely to persist, ensuring the continued strength of the credit ratio within the infrastructure domain.

Manufacturing sector

Conversely, the manufacturing sector witnessed the weakest credit ratio at 1.38, primarily driven by downgrades in the mid-sized corporate segment. Entities with a focus on exports in sectors such as textiles, pharmaceuticals, and chemicals experienced downgrades due to a combination of decelerating global demand and consistently elevated input costs. In the foreseeable future, this segment remains vulnerable to volatile geopolitical situations, soaring crude oil prices, and the challenge of passing on price hikes to end customers.

However, it is essential to underscore the relatively low financial leverage observed across entities within the manufacturing sector, serving as a mitigating factor.

As global interest rates remain elevated, international economic observers closely monitor the unwinding of these rates in developed economies, aiming to avoid a precipitous economic downturn. In the Indian context, the RBI maintains a “wait and watch” stance on monetary policy, keeping interest rates unchanged. The likelihood of rate reductions in the near term appears limited, given the persistently high crude oil prices and the unwavering hawkish positions of central banks worldwide.

A notable exception to the global trend of high inflation and interest rates is China, grappling with subdued growth, low inflation, and a vulnerable financial system heavily exposed to a distressed real estate sector. For India, the potential repercussions of a decelerating Chinese economy include the risk of dumping by Chinese companies, particularly in commodities such as steel, chemicals, and textiles.

This could impact Indian corporates on two fronts — disrupting domestic production due to low-cost ‘dumped’ imports and rendering export markets less attractive as China floods them with inexpensive exports.

In conclusion, the Indian corporate sector exhibits a commendable level of resilience in the face of global challenges. This resilience is underpinned by stable domestic demand, robust balance sheets, and a dynamic financial system. Nonetheless, prudent vigilance over the evolving global landscape remains imperative to identify and mitigate unforeseen risk factors.

The writer is Chief Rating Officer, CareEdge Ratings

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