Investment cycle showing signs of pick-up: Moody's

The agency says a broad-based and sustainable revival in the private sector capital expenditure cycle would likely take longer to materialise

Moody's Investors Service on Tuesday said investment levels in India were showing early signs of recovery, driven by an upturn in capital expenditure and increased public spending.

In its December issue of Inside India, the agency said a broad-based and sustainable revival in the private sector capital expenditure cycle would likely take longer to materialise.

"Recent high-frequency data show that India's investment cycle is starting to pick up," Moody’s vice-president and senior research analyst Rahul Ghosh said.

A revival in private sector capital expenditure will be required to sustain the recovery in investment activity because India's weak fiscal position will limit the ability of the government to further expand public sector-led investment, he added.

"A broad-based and sustainable revival in the private sector capital expenditure cycle will likely take longer to materialise, given the high debt levels in the non-financial corporate sector, asset quality concerns in banking and subdued external demand," Ghosh said.

In its 2016 outlook for non-financial corporates, Moody's said strong domestic growth in India would offset global headwinds. "A healthy 7.5 per cent domestic Gross Domestic Product (GDP) growth for the financial year ending March 2017 and a pick-up in manufacturing activity will be broadly supportive of business growth for India's non-financial corporates in 2016," it said.

It, however, added that corporates remained vulnerable to volatility in the rupee against the dollar.

The agency further said lower commodity prices have benefited many Indian corporates, given the country's status as a net importer of raw materials, and its recent history of high inflation.

"The resultant moderating pace of inflation should result in lower borrowing costs for corporates and lower yields on corporate bonds. But despite these overall supportive domestic conditions for the country's corporates, potential headwinds loom from a loss of reform momentum," it said.

Moody's changed its outlook for India's banking system to 'stable' from 'negative' in November, because of a gradual improvement in the operating environment for Indian banks.

The stable outlook on India's banking system over the next 12 to 18 months reflects Moody's expectation that the banks' gradually improving operating environment will result in a slower pace of additions to problem loans, leading to more stable impaired loan ratios.