Rate hike will push companies closer to default cliff: India Ratings

As much as 11% of BSE 500 companies will come under the 'troubled' category if the repo rate increase translates into lending rates

The latest move by the Reserve Bank of India (RBI) to increase its repo rate by 25 basis points, will increase the number of stressed debt-ridden companies, says India Ratings.

As per the rating agency's calculations, the number of companies that will be closer to debt default will go up to 10.7% from the current 9.5%. As much as 11% of BSE 500 companies will come under the 'troubled' category if the repo rate increase by the Central Bank translates into lending rates. This comes at a time when even at current levels, defaults may be peaking out.

“If the repo rate is increased by another 25 basis points in the next three months, the stress level may shoot up substantially, taking the number of stressed corporates to 13.1% and the amount of stressed debt to 16.5%. This could unleash a second wave of restructuring and non-performing assets,” said India Ratings.

Unfortunately, the agency also foresees more rates hikes due to pressure on emerging market currencies. “However given India’s low real interest rate environment, which is estimated by Ind-Ra at 2.00 percentage points below the 2008 (pre-crisis level), further rate hikes may not be ruled out if the currency further weakens significantly,” the agency said.

On the other hand, consumer price inflation remains 'stubbornly' high. As the country prepares for general elections, the likelihood of moderation in inflation is low. RBI have but few choices between saving the rupee by enhancing real interest rate or unleashing a second wave of corporate defaults. “It may be much higher than default rates observed so far,” said the rating agency.