Medium-term credit growth set for headwinds, predicts India Ratings

Capex revival could get delayed as companies await clarity on the macroeconomic front, says agency.

Inflation, supply chain disruptions and a weak consumption demand could upset the revival in credit growth in the medium term, according to India Ratings.

The reversal of the interest rate cycle--marked by the Reserve Bank of India’s 40 basis points increase in policy repo rate--would weigh down credit growth as borrowings become costlier. India Ra, based on the feedback from rated issuers, projected that capex revival could get delayed as companies await clarity on the macroeconomic front. Furthermore, the war in Ukraine has raised concerns on the continuation of the pace of exports.

However, banking system credit growth has shown a significant pick-up in the early part of FY23. The credit growth was 11.2 per cent year on year (YoY) as on April 08, 2022 compared to 5.3 per cent (YoY) in the same period in April 2021, and highest since July 2019.

India Ratings said in the near term credit growth will come from industries and service sector, even as growth in the agriculture segment remains stable and muted in the retail segment.

A continuing working capital demand from companies, driven by high commodity prices and the beginning of a shift back to the banking system from the bond markets amid rising interest rates are expected to keep the credit growth drivers in place.

The sectors which are likely to continue to perform well include power, metals, cement, chemicals and textiles, while the sectors that are likely to be under pressure include telecom, pharma, and commercial real estate.