India Inc. improves credit quality

Thu, 8 Apr Pre-Open

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The economic environment in the second half of FY10 has remained rather strong. And this has benefited not just the stock markets. Even Indian companies have been able to extract some mileage out of it. Crisil, India's leading credit ratings agency has revealed that number of credit quality upgrades have quadrupled in the second half of FY10 over the first half. On the other hand, downgrades have declined by 30%. Thus, more companies have managed to strengthen their balance sheets by reducing debt than the ones that have weakened it. What more, the trend is likely to continue in FY11 as well.

It should be noted that improvement in credit ratings also augurs well for the credit growth in the country. This is because once companies improve their ratings, they find it easier and cheaper to access credit in order to fund their growth. Thus, in light of this, the ratings agency expects credit growth to be in the region of 20% to 22% in FY11. Of course, certain unforeseeable factors like exchange risks and accelerated hike in interest rates could spoil the party for these companies and could lead them again down the path of downgrades.

Furthermore, on an absolute basis there is still some cause for concern as 426 companies still carry a negative outlook against 105 companies that carry a positive outlook. Important to note that real estate and companies dependent on real estate accounted for nearly one fifth of all the companies with negative outlooks while those in the textile business accounted for one eighth or 12% of the total. Clearly, the real estate sector seems to be paying the price for going in for too much leverage when the going was good.

Ultra low rates to continue in the US

To exit or not to exit the stimulus measures - that seems to be the main question for most central bankers around the world. Especially for the central bank where the epicenter of the financial meltdown was located. As per reports, the US Fed recently discussed an exit strategy from the massive economic support measures.

But more importantly, it took no decision on the matter. And so the ultra low interest rates ranging from 0% to 0.25% continue. They are likely to continue for an 'extended period', a term often used by the bankers. We certainly do not envy the position of the US central bank. One the one hand it has to ensure that the fledgling recovery takes roots and on the other hand it has to prevent runaway inflation. But one thing is clear, sooner or later it has withdraw the heavy dosage of liquidity. If only the developed economies rebounded as quickly as some of the emerging ones.