CRISIL’s credit ratio1 (or number of upgrades to downgrades) stood at 1.68 times in the first half of fiscal 2019, compared with 1.88 times and 1.45 times in the first and second halves of fiscal 2018, respectively.

There were 685 upgrades to 408 downgrades in the first half of fiscal 2019.

For the first time in five years, the credit ratio for investment-linked sectors at 2.15 times printed higher than the overall credit ratio. The uptick can be seen in sectors such as steel, construction and industrial machinery that, besides buoyant commodity prices, benefited from the government’s infrastructure spending even as private investments lag.

As for domestic consumption-linked sectors, the demand growth drivers remain strong, but rising interest rates could act as a mild dampener. Export-linked sectors have seen strong growth revival in recent months backed by buoyancy in the global economy and a sliding rupee.

All is not well, however, India Inc. faces a volatile rupee, rising interest rates and an increase in the risk of tariff disputes between major global economies turning into full-blown trade wars.

CRISIL’s analysis of ~2,500 firms in its portfolio that have foreign currency exposure shows that the impact of recent rupee volatility on profitability will be modest. The top 10 sectors with high foreign currency exposure, which include oil and gas, power and telecom, will see their net profit margins eroding this fiscal by up to 150 basis points. But credit profiles will be cushioned by presence of natural or contracted hedges, ability to pass on increased costs to customers in a buoyant demand environment, lean balance sheets, and support from strong parents or government.

After currency, credit and equity markets have recently turned volatile, in turn, bringing non-banks (non-banking finance companies and housing finance companies) squarely into focus.

The asset liability maturity profiles of CRISIL-rated non-banks currently remain consistent with their ratings, even as their dependence on short-term capital market instruments has risen in the past two years. While asset quality and capitalisation are comfortable at present, continued market disruption can constrain access to funding, and it will be a key sensitivity factor for both growth and spreads of non-banks.

¹ Credit ratio does not factor in rating actions on non-cooperative issuers.