Credit rating agencies Crisil and ICRA have said that downgrades in ratings of Indian companies have outnumbered upgrades in the recent quarters due to weakening liquidity and the volatile rupee emerging as key risks.

Other factors included demand slowdown, inventory losses or increase in raw material costs and delays in debt servicing.

The Director of Crisil Ratings, Mr Ramraj Pai, said: “Our downgrades have outnumbered upgrades for the first time (third quarter of fiscal 2012) in eight quarters. A sizeable proportion of downgrades have been in the textile and construction industries.”

Crisil downgraded ratings on 148 entities in the third quarter of this fiscal while upgrading ratings on 138 entities. A third of the downgrades was caused by pressure on demand or profitability and another third of the downgrades was the result of weakening liquidity, either on account of stretched working capital requirements or large capacity expansions.

“Liquidity has emerged as a key monitorable for Crisil in its ratings of entities,” added the credit rating agency.

“We expect pressure on the credit quality of Indian companies to persist with downgrades continuing to exceed upgrades in the next few quarters. Corporate India continues to face challenges both in the domestic market where there has been a slowdown in the economy and in infrastructure activity, and on the export front, with uncertainty looming large in Europe. High interest rates and sharp movement in currency value have added woes of India Inc,” added Mr Pai.

Crisil's estimates indicate that foreign currency debt of about $17 billion will become due for repayment in the next 18 to 24 months. Refinancing the debt may be difficult because global investors have become increasingly risk-averse, given their uncertain economies back home.

According to data from rating agency ICRA, there were 407 downgrades in the second half of calendar 2011, against 112 downgrades in the same period in 2010. On the other hand upgrades fell to 174 in second half of 2011 from 182 in the corresponding period in 2010. Sectors that saw large downgrades were hotels and power, added their report.

However, ICRA suggested that going forward, the recent sharp downward revision may moderate due to “improvement in liquidity conditions, moderation in cost of funds as interest rates have peaked and stability in exchange rate of rupee especially following the sharp depreciation seen over the last two quarters.”

manisha@thehindu.co.in, Priya.n@thehindu.co.in

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