Weak rupee to add pressure on corporate rating cuts

The sharp fall in the rupee, tight liquidity conditions and uptick in inflation have added to the woes of companies that are already reeling under credit rating issues.

The pressure on credit quality would intensify and the pace of downgrades would continue. The prospects for a turnaround to support upgrades may be postponed in the current financial year, according to rating agencies Icra and CARE.

It is not the just higher-than-expected fall in the value of dollar, which is working as a bug bear. The very tight liquidity conditions are making interest rates sticky.

Naresh Takkar, chief executive and managing director of Icra, said the rupee’s weakness, along with the rise in its volatility, were not good for companies. Also, liquidity was quite tight now, an odd situation compared to the months of April and May in other years. The woes, therefore, were likely to continue for a while.

According to Crisil, the credit quality pressure would continue to weigh on companies in 2012-13 due to the economic slowdown. Besides construction, engineering, steel and textiles sectors, the companies from consumer durables sector which have import intensity, will see pressure on profitability due to the weak rupee.

The deterioration in credit quality led to a spike in rating downgrades in 2011-12. The number of such downgrades would continue to outpace upgrades in the first half of the current financial year. However, it was difficult to predict the scenario beyond six months, said Pawan Agrawal, senior director (rating), Crisil.

Crisil data showed, at 292, the number of rating downgrades exceeded upgrades, which stood at 266, in the October-March period. This marks a reversal in the trend seen in the first half of 2011-12, when upgrades, at 313, were more than downgrades, which stood at 207.

D R Dogra, managing director of CARE, said the scenario was more adverse than earlier expected, especially considering the weak rupee and the domestic uncertainty.

The volatility in the rupee had impacted the flow of capital. “The end of the tunnel is not sight. Can't say with certainty that there would be recovery in the environment for ratings in the second half,” he said. “The cost of funds for companies enjoying better ratings (AA) is high. These are paying rates in excess of 12 per cent for loans,” he added.