Impact of Rising Rates and Inflation on Indian Companies and Banks

S&P Global Ratings has indicated that the rising interest rates and inflation in India could have implications for companies and banks, but rated firms are expected to be better equipped to handle the pressure. Here's an overview of their analysis:

• Interest Rate Hikes: S&P expects further interest rate hikes in India, as inflation remains above the Reserve Bank of India's (RBI) upper tolerance limit of 6%. Despite a 140 basis points increase in the policy rate in the current fiscal year, inflation continues to be a concern.
• Stress Test Results: S&P conducted a stress test on over 800 largely unrated Indian companies representing $570 billion in debt. According to the results, credit profiles of companies accounting for 20% of the outstanding debt could deteriorate in a stress scenario. However, rated issuers are generally better positioned to handle rising rates and higher input costs.
• Positive Impact of Strong Economic Growth: S&P anticipates that India's robust economic growth will have a positive impact on companies' revenues.
• Growth Projections: S&P lowered India's growth projections for the current fiscal year to 7.3% from the earlier estimate of 7.8%. Factors such as high oil prices, slowing exports, and high inflation influenced this decision. Despite inflation affecting the purchasing power of lower-income individuals, various factors are supporting growth.
• Monsoon and Services Rebound: S&P expects a normal monsoon to boost agriculture production and control food inflation. The recovery of contact-based services, aided by improved COVID-19 vaccination rates, will contribute to economic growth.
• Future Rate Hikes: S&P predicts that more interest rate increases are on the horizon. Despite the 140 basis points increase in 2022 so far, policy rates remain below historical levels. It estimates consumer inflation to be around 6.8% for fiscal 2023.
• Sovereign Credit Metrics: S&P believes that India's strong external position and growth momentum will counterbalance the downside pressure on sovereign credit metrics. Although there is a higher current account deficit this year, the country's external balance sheet remains sound due to ample foreign exchange reserves and limited external sovereign debt.
• Corporate Resilience: S&P notes that large rated corporate entities are generally well-prepared to face rising rates, widening credit spreads, and increased input costs. Many companies have undergone deleveraging and improved their operating fundamentals over the past two years. Additionally, most companies do not require significant funding for capital expenditures or financing, which shields them from increased funding costs.

In conclusion, while rising interest rates and inflation pose challenges for Indian companies and banks, rated firms are expected to fare better due to their improved financial positions and ability to manage the impact of these economic factors.