Reserve Bank of India’s (RBI) steps to tighten liquidity will adversely impact car, truck and home sales. It will also reduce volume growth for steel and cement companies, according to ratings agency Crisil.
The steps which will push lending rates ups, may badly hit the debt repayment capacity of companies which are already facing adverse economic and business climates. This will raise the incidence of defaults. And also increase non-performing assets of banks to 4% by March 2014, up from 3.3% in March 2014.
The agency also expects refinancing to be a challenge for companies due to tighter cash conditions, which could prompt more rating downgrades than upgrades in the near term.
Rope Kudva, managing director and chief executive, Crisil said the liquidity squeeze has changed our outlook on change in rating cycle. The companies will face refinancing or rollover challenge due to tight cash conditions.
“The rating downgrades will continue to exceed upgrades in financial year 2013-14. We were expecting the cycle to turn for better (more upgrades than exceed downgrades) in the current financial year”, she said.
Liquidity tightening steps will push up the borrowing costs for commercial banks. So, there is now little possibility of easing of lending rates during 2013.
The interest sensitive sectors will take a knock. The car sales may shrink by 2-3%. The demand for heavy and medium commercial vehicles will decline by 1-3%. The new home sales growth will be around three% down from earlier estimate of 3%, agency said.
It lowered its estimate for growth in India’s Gross Domestic Products (GDP) for 2013-14 to 5.5% from its previous estimate of 6.0%.
The industry and services sector are expected to grow at a lower rate of 3.5% and 6.9% respectively. The forecast for agriculture GDP growth is, however, unchanged at 3.5%, Crisil added.