April 2022


From Chief Ratings Officer’s Desk


In line with ICRA’s expectations, the MPC has maintained a status quo on the repo rate and kept the stance accommodative, in its first review meeting for FY2023, while indicating a change in stance going forward, which we foresee in the June ’23 review. As expected, the MPC lifted its inflation forecast to 5.7% (from 4.5%) and pared its growth projection for FY2023 to 7.2% (from 7.8%). This is based on the price of the Indian basket of crude oil averaging at US$100/bbl. The Central Bank has introduced the Standing Deposit Facility (SDF), a move which will enable it to absorb liquidity. We expect a shallow rate hike cycle in FY2023, and anticipate that yields will trend upwards in the next two quarters.

We also examine outlook for banks which is expected to be ‘Stable’ in FY2023, supported by continued improvement in earnings and in turn driven by sustained credit growth of 8.9-10.2% in FY2023 (9.7% for FY2022). Banking credit growth would come from the non-food segment credit growth, driven by retail and the MSME segments; and partially by co-lending arrangements with NBFCs. For the wholesale credit segment, growth will be supported by a demand shift from the debt capital market to bank credit, in a rising yield scenario. In terms of asset quality, the GNPAs and NNPAs are expected to decline. The deposit growth is, however, expected to slow down. The RoA and the RoE will overall remain steady for PSUs as well as private banks.

The armed conflict between Russia and Ukraine leading to a surge in oil prices will add to the fiscal burden for the country but will be a positive for the upstream oil companies. If this commodity price surge sustains for long, it might impact the Indian economy. Prices of natural gas too have soared to all-time highs as Russia is a large producer of gas. Elevated crude prices may also adversely impact the demand recovery witnessed in the recent months. High crude prices and subdued global demand may adversely impact the refinery GRM in the medium term.

Lastly, we examine the likely impact of increasing prices of imported coal. The same is poised to spike by ~45-55% QoQ in Q1 FY2023 as markets face supply disruptions following the Russia-Ukraine conflict. This will severely impact domestic users of imported coal since prices are expected to stay elevated throughout FY2023. As coal supplies remain tight, domestic coal demand is poised to cross the landmark 1 billion tonnes mark for the first time in FY2022, representing a healthy 12-13% growth over the previous fiscal. As per ICRA’s estimates, given the prevailing low coal stocks, and the steadily rising coal demand, Coal India would need to increase production significantly to avert a domestic coal shortage next fiscal.

The issue concludes with the regular features: monthly rating updates, upcoming ICRA events, and news features related to the company.

I hope you will find this newsletter useful and interesting.

Best Regards

K. Ravichandran
Chief Ratings Officer, ICRA Ltd.

Jitin Makkar

Head – Credit Policy, ICRA

Views on how credit ratings to companies are assigned

Rahul Agrawal

Senior Economist, ICRA

Views on INR Outlook

ICRA Research Updates
April 2022
 
 
Index of Industrial Production: IIP growth rose to 1.7% in February 2022 from 1.5% in January 2022, while trailing the pre-Covid level by 1.6%
Aviation Industry: Domestic air travel sees ~59% YoY growth in FY2022, ~40% lower than preCovid levels; rising ATF prices a concern
Outlook FY 2023: Riding the economic recovery, against geopolitical headwinds
Comments on Monetary Policy: MPC normalises width of LAF corridor, stance change signaled for June 2022 meeting
Rating
Updates
 
 
Rating
Methodologies
 
 
ICRA in News
April 2022
 
 
The Hindu Business Line | 11 April, 2022

RBI begins to give priority to inflation over growth in monetary policy

The Economic Times | 12 April, 2022

RBI’s policy normalisation gets a leg up, say analysts

Business Standard | April 11, 2022

Geopolitics could shape FY23 asset quality

Upcoming Events
 
Watch this space for upcoming events
 

Aditi Nayar

Chief Economist, ICRA

Stance change signalled for June 2022

The first Monetary Policy review meeting for FY2023 was rather eventful, coming in the backdrop of an easing of the pandemic and a flaring up of geopolitical tensions. The Monetary Policy Committee (MPC) maintained a status quo on the repo rate and kept the stance accommodative, in line with our expectations. However, it normalised the width of the liquidity adjustment facility (LAF) corridor to pre-pandemic levels by introducing the Standing Deposit Facility (SDF) at 3.75% as the floor rate, in place of the fixed rate reverse repo (FRRR), which was kept unchanged at 3.35%. This move would enable the Central Bank to absorb liquidity without providing any collateral, augmenting its toolkit

Anil Gupta

Vice President & Co-Group Head, Financial Sector Ratings, ICRA

Banks’s credit growth estimated at 8.9-10.2% in FY2023; outlook stable, however, performance of restructured loan book poses uncertainty to asset quality

ICRA Ratings expects outlook for banks to be ‘Stable’ in FY2023, based on continued improvement in earnings driven by sustained credit growth of 8.9-10.2% in FY2023 (9.7% for FY2022 and5.5% in FY2021) and decline in credit provisions. In its latest research note on the financial sector, the ratings agency states that banking credit growth would come from non-food segment credit growth which continues to be driven by retail and MSME segments; and partially by co-lending arrangements with non-banking finance companies (NBFC)s. Whereas wholesale credit segment, growth will be also be supported by demand shift from debt capital market to bank credit, in a rising yield scenario as was seen in FY2019.

Prashant Vashisht

Vice President & Co-Group Head – Corporate Sector Ratings, ICRA

Oil price increase positive for upstream sector, however, losses for oil marketing companies to prolong

The armed conflict between Russia and Ukraine led to a reduction in offtake of Russian crude and a consequent increase in crude oil and gas prices. ICRA notes that increasing oil prices add to the fiscal burden for the country, but it is a positive for upstream oil companies. Additionally, domestic gas prices notified at $2.9/mmBtu (GCV basis) for H2 FY2022 remain low and accordingly gas production remains a loss-making proposition for most of the Indian upstream producers. While domestic gas prices are expected to increase substantially in the next revision, the gas business of PSU upstream companies would turn profitable.

Jayanta Roy

Senior Vice President & Group Head – Corporate Ratings, ICRA

India Inc. to face significant cost inflation as coal prices feel the tremors of the Russia-Ukraine conflict

Prices of imported coal are poised to spike by ~45-55% Q-o-Q in Q1 FY2023 as markets face supply disruption following the Russia-Ukraine conflict. As per latest ICRA note on the coal sector, this will severely impact domestic users of imported coal since, notwithstanding some moderation from the alltime highs of March 2022, coal prices are expected to stay elevated throughout FY2023. Russia remains a key supplier of coal in the seaborne market, accounting for ~17% and ~10% of the international trade in thermal coal and coking coal respectively.

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