Inflation may lead to downgrade of Indian banks: S&P

High inflation is the biggest risk that banks in India and other countries of the Asia-Pacific region face, Standard & Poor’s (S&P) said in a note on Tuesday.

The agency said the outlook for the credit quality of banking in Asia-Pacific was stable and was backed by robust economic growth and healthy household and corporate sectors. However, high inflation could result in a downward revision of the rating agency’s outlook on banking in the Asia-Pacific region. “The impact is likely to come from policy responses to high inflation, which could cause steep property price corrections and put pressure on banks' profitability,” S&P said.

Citing inflation as the primary challenge, the Reserve Bank of India (RBI) had raised policy rates nine times since March 2010. The latest rate increase, announced in the annual monetary and credit policy for the current financial year, was the biggest — one of 50 basis points. Other than rate increases, RBI had also stepped up provisioning requirements for bad loans and had asked banks to create a ‘counter-cyclical buffer’ to protect them from any macroeconomic shock in the future.

RBI is scheduled to review the policy on June 16. “If inflation stays high, RBI may consider another rise of at least 25 basis points next week,” said a bond dealer with a domestic brokerage.

Inflation, as indicated by the wholesale price index, was 8.66 per cent in April, a decline from 9.04 per cent in March. Food inflation data released every week also showed some respite. It stood at 8.06 per cent as on May 21, lower than 8.55 per cent a week ago. Fuel and power prices, however, rose from 12.11 per cent to 12.54 per cent in the same period. Inflation data for May would be released on June 14.