RBI proposes using equity price movements to signal corporate stress

Apex bank's FSR report says equity prices may also be used to determine 'intermediate' rating action, but advises caution about the extent such use

The Reserve Bank of India (RBI) has proposed using the movement in equity prices as part of a larger mechanism that can serve to give early warning signals of a potential default in a stressed company.

“Though all equity movements may not be of relevance for bond valuations, since bonds are superior in terms of claim hierarchy, they still present an early sign of distress,” the apex bank said in its 20th Financial Stability Report (FSR).  “Therefore, it may be useful as an early warning mechanism to convert equity prices to an imputed distance to default measure to which the