Stimulus slows credit downgrades of firms

The worst seems behind in the long road to recovery

The country's unprecedented stimulus measures to fight the coronavirus crisis seem to have slowed the worsening of corporate credit quality.

There have been around five downgrades for every one upgrade of rupee debt of companies since July 1. That's a major improvement when compared with a ratio of almost 11 to one in the quarter ended June 30, a record rate, according to a review of rating moves by four main credit assessors-Care Ratings, Crisil, Icra and India Ratings & Research.

"The stimulus has brought incremental relief to firms in India, helping them to stay afloat and avoid the risk of closures," said T.N. Arun Kumar, chief ratings officer at Care Ratings Ltd. "The measures have helped corporates tide over cash problems and boosted their short-term credit profiles."

Borrowing costs have declined for local companies due to a barrage of stimulus steps. The central government unveiled $277 billion of stimulus in May, while the Reserve Bank pumped $50 billion of cash into domestic banks in March and it has cut its benchmark repurchase rate to the lowest level ever. The lower funding rates are important for the corporate sector, which faces a bill of about Rs 1.5 lakh crore ($20 billion) in bond repayments in the September quarter.

Yield premiums for AAAranked 10-year rupee company notes over similarmaturity sovereign debt have declined to 80 basis points from 152 at the end of May, the highest since 2009.

The market may face rough weather again, much like in March this year, and move in the direction of foreign flows, as inflows from domestic institutions have started slowing down, especially from mutual funds and insurance companies, as indicated by June and July monthly data.

In August too domestic institutions have been booking profit and brisk inflows from the foreign portfolio investors are keeping the market momentum intact.

In August so far FPIs have invested Rs 10,420 crore, surpassing the July month investment of Rs

7,563 crore.

On Tuesday domestic institutions were net sellers by Rs 1,415.54 crore while the foreign portfolio investors were net buyers by Rs 1,013.66 crore.

Whether these are sticky investments from the long only funds or short-term investments by fly by night operators, only time will tell.

India witnessed foreign portfolio investment outflow of $16.05 billion in March 2020 and $1.97 billion during April-May

2020, triggered by the

Covid-19 fallout on domestic and global economy.

Upcoming US presidential election and continuing threat of Covid-19 are likely to drive investors away from risky asset classes.

Mutual fund flows have fallen sharply in June and July to Rs 240.55 crore and an outflow of Rs 2,480 crore respectively compared to inflows of Rs

6,212.96 in April and Rs

5,256.52 crore in May 2020. "Net flows in the open ended equity fund category have been on a downward spiral since April and barely positive at Rs

240 crore in June. In July, the trend continued, leading to net outflows of Rs

2,480 crore. On the positive side, flows through systematic investments plans (SIPs) have sustained around the Rs 8,000-crore mark till June (numbers for July are yet to be released), said a report by rating agency Crisil..

Private life insurance players' premium declined

7.1 per cent in July 2020, similar to the decline in June 2020 while the life insurance industry as a whole posted a decline of

0.3 per cent. The overall decline has moderated considerably from the levels seen over March-May

2020. For FY21 year to date, private players’ individual premium received declined 18.1 per cent yearon-year while for the industry, it dropped 12.6 per cent YoY, said a report by Motilal Oswal.

So far this year, the impact of foreign investors pulling their money out of India did not lead to any macroeconomic instability. Rather, foreign exchange reserves increased to $517.64 billion (foreign currency assets:

$477.81 billion) on 17 July

2020 from $476.88 billion

($442.21 billion) at endMarch 2020.

The rupee's strength against foreign currencies remains the key to foreign portfolio investors staying invested in India, said analysts.

“Swelling of foreign exchange reserves in combination with benign oil prices and tepid imports, leading to a current account surplus, has helped the rupee to remain broadly stable since mid-March 2020, despite deterioration in some of the other macro parameters such as retail inflation, fiscal deficits and negative GDP growth,” said India Ratings & Research.