Mumbai, Jan. 28: India Inc has reason to worry over the latest round of policy rate hikes.
A study by India Ratings and Research, a Fitch group company, says the number of stressed corporate houses could now rise to 10.7 per cent of the BSE 500 companies from 9.7 per cent earlier.
If the Reserve Bank of India pulls the trigger again – raising rates by another 25 basis points – the number of stressed corporate houses will rise to 13 per cent or more.
The study, which was carried out last December, said the BSE 500 corporates could at best weather an interest rate hike of 25 basis points to 50 basis points. The projection was made after the two rate increases by governor Raghuram Rajan in September last year.
The report said a 75 to 100 basis points increase in the repo rate could increase the number of stressed BSE corporates to 13.1 per cent from 9.5 per cent.
However, the amount of stressed debt may increase to 16.5 per cent (of the total balance sheet debt of BSE 500 corporates) from 10.9 per cent. The report added that this could unleash a second wave of restructuring and non-performing assets (NPAs).
That is bad news for banks that are already wrestling with mounting bad debts on their books — and the prospect of making higher provisioning to comply with the central bank’s prudential guidelines.
At the end of 2012, major emerging nations such as South Africa, Mexico, India and Brazil had real interest rates that were much lower than the pre-crisis level. In most other emerging nations, the recent real interest rates were higher than that in the pre-crisis period.
In 2012, India had a real interest rate of 2 per cent below the pre-crisis level. Thus far in 2013, policy rates have remained unchanged on a net basis from the start of the year. While from May 2013, policy rates have increased by 75 basis points, the banking system lending rates have not increased in tandem.
While policy rates have been increased from September 2013, system-wide lending rates are yet to catch up. However, recent evidence suggests that monetary transmission works better in an increasing interest rate environment.
In the event that there is any pressure on the rupee, policy rates may be increased and transmitted to the system. Given the real interest rate situation and foreign currency stress, a 100 basis points to 200 basis points increase over a short period of time cannot be completely ruled out, the report added.