'Uncertainty related to inflation has not gone'

'In addition, we have geopolitics and politics and all the other things that will affect commodity prices.'

While the financial health of rated companies is expected to remain robust, firms are hesitant to start capital expenditure, Ramnath Krishnan, managing director and group chief executive, Icra, tells Abhijit Lele/Business Standard in a video interview.

Volatility in inflation still remains substantial and interest rates are not expected to come down.

We are in the busy season. Given the growth momentum, what is the assessment about capital expenditure and the outlook?

Expenditure, particularly in the private sector, is yet to go up significantly.

Plans are being drawn up and some plans are getting deferred. A few days ago JSW Steel deferred its expansion plants.

Prior to the Lok Sabha elections, there was a view that people were waiting for the outcome.

Most people thought the result was a foregone conclusion. But activity hasn't yet picked up.

What is weighing on the mind of corporate decision makers?

Urban consumption was holding up all of last year while rural consumption was tepid.

This year there have been some signs of more unevenness coming through aggregate demand.

Last year, aggregate demand was strong and was continuing to strengthen.

This year, even the aggregate ticked down as shown by the consumer surveys in May and July.

And while it's gone up in the September round, it remains below the peak.

We are looking at the commentary from different companies as to how they are gauging urban demand.

This may be something that would bring in a little bit of hesitancy in capital expenditure right away.

So companies are not confident about the durability of demand?

They are not. Also when we look at inflation, volatility remains substantial. Although we are hopeful the benefits of the monsoon both in terms of growth and inflation are ahead of us, uncertainty related to inflation has not gone.

In addition, we have geopolitics and politics and all the other things that will affect commodity prices.

This is a pure macroeconomic view. But, on capex there are some more parameters coming into play in their assessments.

So if there are concerns or uncertainties lurking, the level of confidence firms will have to commit to capital expenditure is likely to be somewhat muted.

The other concern is the fact that the interest rates aren't coming down in the near term.

So, though the Reserve Bank has changed stance in the recent policy committee meeting, it hasn't resulted in any interest rate reduction.

And we may not necessarily see any administrative opportunities until the end of this financial year.

So, to that extent the cost of borrowing is likely to be higher.

What is going to be the likely level of corporate market borrowing? And what is going to be your rating volumes?

We've seen a significant uptake in market borrowing aka bond issues in the second quarter this financial year.

Bond issues went up almost 65 per cent year-on-year. It was supported largely by financial institutions.

Our expectation is that while we may not see a growth rate of 65 per cent, we expect the rate to be buoyant in the rest of this financial year.

Relatively speaking, I think support will come from financial institutions, not so much from companies.

Coming to the quality of ratings, we saw the upgrade to downgrade ratio was in a healthy zone in the first half. What is the outlook for the next 12 months?

In general, the health of India Inc is good. So, we expect the credit ratio to be in the positive zone and expect the number of upgrades to exceed the number of downgrades.

Feature Presentation: Aslam Hunani/Rediff.com