India Ratings expects defaults to rise if interest rates go up

 

 

 

Mumbai: Ahead of the Reserve Bank of India’s (RBI) monetary policy review on 1 April, India Ratings and Research Pvt. Ltd on Thursday warned of a 14-15% rise in the number of stressed companies in the country if interest rates go up by up to half a percentage point in the approaching months.

“If interest rates are increased further by 25-50 bps (basis points) in the next three to six months, the number of stressed corporates in BSE 500 will rise in the range of 14%-15%,” Indian Ratings said.

One basis point is one-hundredth of a percentage point.

In January, RBI raised its policy rate by a quarter percentage point to 8%, refusing to lower its guard against high inflation. That was RBI’s third rate increase in five months.

Many economists expect RBI to maintain its key rates on 1 April given that inflation has begun easing in recent months. Eleven of 12 analysts polled by Bloomberg expect interest rates to remain unchanged at the policy review next week.

Wholesale price inflation (WPI) slowed to 4.68% in February from 5.05% in January. Retail inflation too slowed to 8.1% in February from 8.795% in the previous month.

“Any interest rate hike in the next three to six months may wither even the signs of green shoots. This could act as a strong argument against any hike in interest rate at least till September 2014,” India Ratings said.

The company, formerly known as Fitch India, said 15% of the balance sheet debt of BSE 500 companies is either approaching stress or already under financial stress, citing its analysis of corporate performance for the first nine months of fiscal 2014.

“Another 25 bps-50 bps hike in interest rates may push this number to 16% of the balance sheet debt,” India Ratings said.

About 11% of the loans given by Indian banks to companies and individuals are already under stress—means they are either bad or being restructured—according to data available till end-December.

This comprises about Rs.2.43 trillion of gross bad loans and at least Rs.4 trillion restructured assets through various channels.

 

 

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