Growth-inflation dichotomy crucial for ultra-loose monetary policy condition: India Ratings

India Ratings and Research expects interest rates to stabilise at the current level and the Indian currency to undergo structural changes. The agency believes culmination of the rising growth-inflation dichotomy and a sustained improvement in the balance of payment account will become crucial determinants for ensuring ultra-loose monetary policy conditions by the Reserve Bank of India.

During the COVID-19 outbreak, abundant liquidity in debt capital markets has played a major role in alleviating excessive risk version sentiments and common funding challenges prominent during a the crisis time.

The RBI has taken various steps to encourage banks to lend to entities in need and mitigate the impact of cash losses during the lockdown. This was further aided by the regulatory forbearances and targeted fiscal support.


All these have ensured capital flows to a large section of borrowers and lenders at a cheaper cost. Though the access to capital and bank credit was largely concentrated among few top-rated borrowers during the initial months, the access to capital for lower rated borrowers has improved recently.

“The agency believes that debt capital markets will remain conducive for AAA and AA category borrowers,” India Ratings said. “However, the damages in the economy due to the pandemic is not something to go away anytime soon; therefore, it needs to be monitored and examined.”

A fragile and two-track recovery both at the macro and micro levels would keep the financial condition unstable, the agency further noted.

“In this regard, the agency believes that benign monetary policy conditions could only act as an enabling factor, and for broad-based recovery on a sustained basis, a combination of massive private and complementary public spending is necessary,” it said.

The rating agency also expects the pressure on corporate credit profile to remain unabated, though regulatory forbearance and restricted business activities have provided an initial breathing space.

Eligible issuers impacted by COVID-19 and primarily rated in the investment grade (BBB and below) category could benefit from the RBI’s debt restructuring scheme over FY22 and FY23,” it said.

However, issuers rated in the speculative grade (BB and below) category who are ineligible for the restructuring scheme could see negative rating actions.

“The intensity of rating downgrades, including defaults, particularly for leveraged entities and entities lower on the rating scale, will depend on the effective transmission of the recently announced economic stimulus package and banks providing timely and adequate funding support,” the rating agency noted.