GDP growth to pick up in the second half, driven by emerging tailwinds, says ICRA Chief Ramnath Krishnan

If I recollect right, at the start of the year, we had a GDP forecast of 6.5 per cent. We had raised that to 7 per cent. Did the first half see numbers close to this? The Q2 numbers were quite disappointing. However, we do expect growth to pick up in the second half and there are some tailwinds as well which are actually building into the second half, and we expect to close the year at 6.5 per cent. Inflation, to be honest, remains a concern, and food inflation is naturally a very large component of that basket. Now, from the RBI standpoint, if there are concerns on inflation, it will be very, very difficult for them to take a call that they’re going to reduce interest rates despite the weak GDP print for the last quarter. So, I think, that’s a narrative you’re hearing from the central bank repeatedly. They’ve changed the stance now, but our own view is that we will only see a drop in interest rates in the February 2025 meeting if the inflation prints recede sharply.

The credit ratio (the ratio of the number of upgrades to that of downgrades) is still in the positive zone and we are still seeing more upgrades as compared to downgrades. However, it is moderating compared to what we saw, let’s say, post-Covid. It is not as high as it was at that point in time. It was 3 at one point in time, came down to about 2.7, 2.6, and so on and so forth. So, it has been moderating since then. Whilst the upgrades are still higher than the number of downgrades, but the delta is actually reducing. It has actually moderated.

During Covid, a number of corporates deleveraged. They conserved capital, deferred expansion plans, etc. So, the balance sheets in general of India Inc are actually in a pretty decent space. Therefore, their ability to take a few knocks here and there, I think, is better at the present time as compared to where they were probably about three or four years ago.

We have a positive outlook, at the present time, on just one sector, which is hospitality. On most of the sectors, we have a stable outlook. We have a negative outlook on select sectors like microfinance, telecom towers, chemicals, bulk tea, and cut and polish diamonds. Now, coming to the sectors where we have a stable outlook, probably more topical are banks, NBFCs etc. While it’s stable, we are obviously seeing stress, and there will be players who are seeing a challenge. When we say our outlook for a sector is stable, that doesn’t necessarily mean that the outlook that we assign to an individual player in that sector will also be stable. So, this is only at the overall sector level, taking into account all the players that we see and are in our rated universe.

When we rate an individual issuer, individual borrower, it is primarily driven by the fundamentals of that particular entity, keeping in mind the overall landscape for that sector. So, that is how we sort of marry the two and then assign the rating to that particular issuer or that particular borrower. These two don’t have to be necessarily consistent with each other. So, the outlook can be different...Similarly, you could also have sectors where we have a negative outlook, but a player, an individual player might have a stable outlook. So, that again is actually possible.

I think, it’s just basically the post-Covidsurge in demand. People are actually getting out a lot, eating out a lot. They’re going on holidays a lot more. So, I think, it is just consumer sentiment. And thanks obviously to the average room rentals, which have been fairly attractive, the occupancy rates have been pretty good. A lot more weddings. Through Covid obviously weddings were all very restricted, and smaller crowds and so on and so forth. So, now everybody is right now splurging. In the near term, at least, we expect that sector to continue to do well, also because the supply additions are lagging demand.