The recent steps by the Reserve Bank of India to tighten liquidity, against the backdrop of sharp rupee volatility, will delay economic recovery and add to corporate India’s challenges.
Roopa Kudva, Managing Director & Chief Executive Officer, CRISIL, said, “Credit quality of corporates is likely to be weakened by slow growth in GDP, heightened currency volatility, and higher-than-expected interest rates.
Specifically, stress will increase in sectors such as power, construction, engineering, and steel, and lead to higher non-performing assets in the banking system.”
Crisil believes that India’s economic recovery will take longer than previously expected.
According to Mukesh Agarwal, President, Crisil Research, “We have lowered India’s GDP forecast for 2013-14 (refers to financial year, April 1 to March 31) by 50 basis points to 5.5 per cent, given the reduced likelihood of interest rate cuts and weak momentum in both industry and services.”
In contrast with 2009, the global environment is much more stable today, and challenges for India’s economy are mainly domestic. Industrial growth plummeted to a 20-year low of 1 per cent in 2012-13, growth in private demand slowed down to a 12-year low of 4 per cent, and private corporate investment continues to be weak.
RBI’s recent measures — capping the access of banks to systemic liquidity, and mandating a higher minimum daily cash reserve requirement — have halted the declining interest rate cycle and tightened systemic liquidity. CRISIL Research expects demand in the rate-sensitive sectors to remain under pressure.
Industry sales
Slower income growth, and higher rates and fuel prices will impact automobile sales.
Agarwal said, “We expect car sales to decline by 2 to 3 per cent, and medium and heavy commercial vehicle (MHCV) sales to decline by 1 to 3 per cent in 2013-14. We have also lowered growth in new home sales by 400 bps, and volume growth for steel and cement by about 100 bps.”
The agency expects credit quality pressures on corporates to continue, given the difficult environment. The pressure will be greater on firms with higher leverage and longer working capital cycles. In addition, refinancing pressures will increase for corporates on account of weak systemic liquidity.
Further, Crisil expects banks’ non-performing assets to increase to around 4 per cent of advances by end-March 2014 from 3.3 per cent a year ago.