The primary impact of the downgrade in US sovereign rating will be on the availability and cost of funding, both domestic and international, according to credit rating agency Crisil.
Globally, an increase in risk aversion will reduce appetite for emerging market risk and could affect the ability of Indian companies to raise money externally, the agency said. Access to equity markets, too, is likely to be muted.
“The secondary impact will be on demand. Export growth is likely to slow down and domestic private consumption, which has been strong so far, could moderate as consumers become more cautious,” Ms Roopa Kudva, Managing Director and CEO, Crisil.
Volatility in exchange rates are also expected to increase, the rating agency said in a statement.
Downgrades to go up
While the agency continues to see upgrades, it expects a higher number of downgrades and higher defaults. Rating actions so far already reflect this expectation.
“In the first quarter of 2011-12, the number of downgrades was 105, as against 269 in entire 2010-11. The number of defaults was 43, more than a third of the number of defaults witnessed in 2010-11. We expect these trends to continue,” says Mr Ramraj Pai, Director, Crisil Ratings.
Modified credit ratio (upgrade:downgrade ratio) for the first quarter was lower at 1.05 as against 1.10 for the year 2010-11.
According to Crisil's assessment, companies that will be more vulnerable include those with higher exposure to developed economies, significant un-hedged foreign exchange exposure, higher funding requirements and dependence on refinancing (companies whose foreign currency convertible bonds are due for redemption or that have higher dependence on short-term debt).