The Reserve Bank of India (RBI) is expected to maintain status quo in the mid-quarter monetary policy review slated next Friday. The central bank has not changed policy rates since May citing inflationary risks from falling rupee.
Arun Panicker, chief analytical officer at CRISIL said that RBI was unlikely to change policy rates in September 20 since rupee vulnerability was still high. He was responding to queries on Twitter in a chat organized by CRISIL today.
Presently, the policy rate or the rate at which banks borrow from RBI stands at 7.25%.
The ratings agency expects rupee to rebound to 60 per dollar on the assumption that the current account deficit may decline to 3.9% by March 2014.
High forex volatility
The Indian currency has depreciated by 17% since the start of this financial year. Two weeks ago, rupee had recorded a lifetime low of 68.83 against the greenback.
However, according to CRISIL, forex volatility may not be as bad for the economy as it appears. “Despite the significant depreciation in the rupee, foreign exchange vulnerability is the least of the stress factors impacting the credit profile of as many as 2481 firms rated above the investment grade,” CRISIL pointed out in its report—State of the nation. It affects only 6% of them, CRISIL said.
Investment grade refers to credit ratings of ‘BBB-’ and above. These firms account for about 82% of the corporate debt rated by CRISIL. (These do not include many of the major groups such as Essar, GMR, GVK, JSW, Jaypee and Videocon that are facing higher forex risk)
The report said that aggregate forex-denominated debt stood at about $100 billion as on March 31, 2013, which was about 50% of the total corporate forex debt in India. The debt was concentrated in a few firms, with the top 1% accounting for more than 85% of it.
After rupee went spiraling downwards, the RBI tightened short-term liquidity flow to the banking system. This led to a surge in short-term interest rates. Panicker said that RBI may not lift these measures as yet since risk to rupee is high.
CRISIL said that liquidity pressure was a source of stress for 16% of the companies analysed by CRISIL. For larger firms, those with operating income of more than Rs1000 crore, the risk was higher at 27%. Increasing financing cost and higher levels of indebtedness was impacting larger firms.
CRISIL expects industrial growth to stay subdued this fiscal. Sectors like infrastructure, cement, steel, power, construction and automobiles would suffer the most.
CRISIL expects inflation to rise due to higher crude oil prices and depreciating rupee despite economic slowdown. The Wholesale Price Index (WPI) may be higher than 6% for the month of August. The data is due on Monday. In July, WPI was higher by 5.8% as compared to last year. For the current financial year, rise in WPI is expected at 6.2%.
The silver lining
CRISIL said that agriculture was set to surprise on the upside because of a bountiful and well-distributed monsoon. The Farm GDP growth could more than double from last year’s 1.9% to 4.5%. “This will help check food prices and support rural consumption,” said the report. In case agricultural growth surges 6% as seen in 2010-11 after a good monsoon, the overall GDP growth could be 5.2%, higher than 4.8% expected by CRISIL.