The relatively lower level of fresh funding in the economy in the first six months of this year indicates that the investment environment is downbeat, according to credit rating agency CARE Ratings.
Fresh funding from all sources during the first six months of this year relative to last year was lower at Rs 4.22 lakh crore compared with Rs 4.61 lakh crore last year.
“Overall, the flow of funds for production and investment purposes appears to have slowed down during the first half of the year. This is a serious cause for concern as it does indicate lower level of economic activity,” said the rating agency in an economic update.
The sources of funding in the economy are: bank credit, capital markets – debt and equity, external commercial borrowings and foreign direct investment.
Slowdown in bank credit
In the April – September 23, 2011 period, bank credit has grown at a much slower rate in terms of both conventional credit (Rs 1,51,072 crore against Rs 1,80,440 crore in the corresponding period last year) as well as credit-like instruments (Rs 11,185 crore against Rs 32,585 crore in the corresponding period last year).
Slower growth in industry as well as higher cost of credit was a deterrent to growth in bank credit.
Moderation in debt and equity issuances
Basing its assessment on CMIE data, the agency said debt and equity issuances have moderated during April-September 2011 by 27 per cent and 67 per cent respectively as compared with the same period last year.
In the reporting period, debt issuances were at Rs 92,719 crore (Rs 1,27,175 crore in April-September 2010) and equity issuances were at Rs 14,919 crore (Rs 45,288 crore).
In the April-September 2011 period, the share of financial services companies was highest in the capital market — debt and equity — issuances, accounting for 71.6 per cent (60 per cent) of the total fresh issuances followed by the services sector with a market share of 11.7 per cent (8.5 per cent).
Manufacturing sector raised 9.5 per cent (19 per cent) of the total resources.
The agency said moderation in capital market issuances could be attributed to the hawkish monetary policy stance of the Reserve Bank of India as well as the depressed secondary market condition, which discouraged initial public offers.
ECBs
Indian companies raised more funds through the ECB route in the first five months of the current year as compared with the year-ago period. They mopped up $15.93 billion ($ 7.46 billion).
With interest ratesbeing raised relentlessly by the RBI and those in the western markets being stable in the downward direction, the interest rate differential between euro markets and India has widened, making ECBs an attractive option even after adjusting for country rating and exchange risk, said the agency.
The agency, however, warned that going forward, the relative attractiveness of the ECB route could come down given the high degree of volatility in the rupee and the expected volatility in the future.
FDI
In the April-July 2011 period, foreign direct investment went up by 92.34 per cent to $14.54 billion from $7.56 billion in the year ago period as inflows were robust in the initial months.
During the April-July 2011 period, the sectors that attracted the maximum FDI include drug and pharmaceuticals (20.64 per cent), services (16.91 per cent) followed by telecommunications (12.01 per cent).
According to CARE, despite uncertainties in the global economy, FDI is expected to touch $35 billion in FY12, as against $19.4 billion realised in the last fiscal.