June 2022


From Chief Ratings Officer’s Desk


In its June 2022 Policy Review, the Monetary Policy Committee (MPC) raised the repo rate by 50 basis points to 4.90%, as well as the SDF and MSF rates to 4.65% and 5.15%, respectively. With the MPC’s FY2023 projections of inflation at a worrisome 6.7% and real GDP growth seen at 7.2%, further rate hikes are unavoidable. The May 2022 CPI inflation is printed at 7.0%, well above the medium-term target range of 2-6%. In addition, the INR's depreciation and the hardening of crude oil prices pose risks to the inflation trajectory. We expect the policy repo rate to be raised by 35 bps and 25 bps, respectively, in the next two Policy reviews, followed by a pause.

We also examine the Indian data centre (DC) market where large hyper-scalers who outsource their storage needs to third-party DC providers are driving the market, which is seeing steady expansion. To meet rising demand, the DCs are expected to add 3900-4100 MW of capacity over the next five years, including investments of Rs. 1.05 – 1.20 lakh crore. Regulatory backing, fast-developing cloud computing, increasing internet penetration, and adoption of new technology, among other things, will all help. In the Union Budget 2022-23, the GoI gave the DCs infrastructure status. Revenues and margins in the industry are also expected to rise.

Given the floating nature of mortgage loans, the RBI's recent policy rate hikes has exposed the mortgage-based securities (MBS) originated by housing finance companies to interest rate fluctuations. However, the credit profile of the MBS pools is unlikely to deteriorate materially. Lenders are expected to increase the marginal cost of funds-based lending rate in an increasing interest rate environment, but the transmission may not be uniform, resulting in a contraction of the interest spread.

Lastly, we examine the impact of export duty on the steel industry. Almost 95% of India’s finished steel export basket has been hit with 15% export duties and domestic steel prices could potentially correct by ~10-15% due to weak demand during the monsoon quarter. The industry could now be on way to an accelerated mean reversion in margins as the operating environment becomes far less attractive. Steelmakers could see spreads sequentially contract by US$75-100/MT in Q2 FY2023. Expansion plans of many steelmakers could be impacted if the duties are maintained in the medium term.

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.

Rahul Agrawal

Senior Economist, ICRA

Views ICRA Business Activity Monitor

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June 2022
 
 
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Tractor Industry: Healthy rural cash flows to support tractor demand even as MSP hikes remain modest
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June 2022
 
 
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Aditi Nayar

Chief Economist, ICRA

Rate hikes to continue in Q2 FY2023

The Monetary Policy Committee (MPC) increased the repo rate by 50 bps to 4.90% in its June 2022 Policy review. Accordingly, the relatively new Standing Deposit Facility (SDF) rate, which forms the floor of the liquidity adjustment facility (LAF) corridor, has been upped to 4.65%. Simultaneously, the marginal standing facility (MSF) rate, i.e. the ceiling of this corridor, has been enhanced to 5.15%. The words “to remain accommodative” were dropped from the stance that was published in May 2022. The inflation forecast for FY2023 was significantly increased to a relatively alarming 6.7% from the April 2022 projection of 5.7%, while the real GDP growth forecast was maintained at 7.2%. With the Governor highlighting that the revised repo rate of 4.90% remains below the pre-pandemic level, rate hikes are clearly set to continue.

Rajeshwar Burla

Vice President & Group Head – Corporate Ratings, ICRA

Massive five-fold increase in capacity in Indian Data Centres with investments of Rs. 1.05 to 1.20 lakh crore in pipeline

The favourable regulatory support, rapidly growing cloud computing, increasing internet penetration, Government effort on digital economy, adoption of new technologies (IoT, 5G etc), growing needs of hyper-scalers are some of the major factors driving the demand for data centres in the country. The sector is likely to witness a five-fold increase in capacities in next five years with capital investment of Rs. 1.05 - 1.20 lakh crore. In addition, Government of India (GoI) accorded infrastructure status to the data centres in the Union Budget 2022-2023. This will enable the players to get access to longer tenured debt at competitive rates and access to foreign funding through the external commercial borrowing route.

Samriddhi Chowdhary

Samriddhi Chowdhary

Vice President & Co-Group Head – Structured Finance Ratings, ICRA

Impact of rising interest rates to have limited impact on credit quality of ICRA-rated MBS pools

The Reserve Bank of India (RBI) announced a 40 basis points increase in policy rates in May 2022, after a pause in 12 Bi-Monthly policy meeting, ushering in the increasing rate cycle. Given the typical floating nature of mortgage loans, mortgage-backed securities (MBS) originated by housing finance companies (HFCs) are inherently exposed to fluctuations in interest rate. With the onset of increasing rate cycle, following the policy rate hikes announced in May 2022, the interest rates for the underlying loans as well as the yield for the investor is expected to increase. As per an ICRA note, the impact of rate hike on MBS pools is not likely to weaken their credit profile materially, given strong collections, availability of other forms of credit enhancements and possible pass-on of rate hikes with some lag to the underlying borrowers.

Jayanta Roy

Senior Vice-President & Group Head – Corporate Ratings, ICRA

Steel industry hit by a moving train as Government cracks the whip, imposes export duty to reign in elevated prices

On May 21, 2022, in an attempt to improve domestic steel availability and reign in steel prices, the Union Government imposed a 15% export duty on a range of finished steel products1 which accounted for almost 95% of India’s overall finished steel exports in FY2021 and FY2022. In other steel categories, an export duty of 15% has also been levied on pig iron2. With domestic mills opportunistically tapping export markets, finished steel exports have so far accounted for ~10-11% of India’s finished steel production in the last two fiscals. However, the imposition of the 15% export duty would make exports significantly less attractive going forward, which in turn could exert pressure on domestic steel prices and industry capacity utilization levels. Interestingly, the Government has chosen to keep steel semis out of the ambit of export duties. Therefore, we believe that export of semis, which declined by 26% year-on-year (Y-o-Y) in FY2022 to 4.9 million tonnes (mt) is likely to witness a significant increase in the current fiscal.

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