Default risk of firms drops at fastest pace in a decade

Default risks for Indian firms are declining at the fastest pace in more than a decade as the central government deploys huge stimulus to support local companies hit by the impact of the pandemic.

The cost to insure against nonpayment by a basket of Indian companies, including Reliance Industries and State Bank of India, dropped by 252 basis points in May and June combined, the most for any two-month period dating back to 2009, according to CMA prices.

The government unveiled $277 billion of stimulus in May and the Reserve Bank of India cut benchmark borrowing rates to the lowest since at least 2000 to help an economy that’s facing a contraction after the world’s largest lockdown.

“India’s economic package, though a delayed one, was a recognition of the critical state of the economy because of the pandemic,” said Ajay Marwaha, head of investment advisory for Sun Global Investments in London. “This has brought relief to global investors and helped boost Indian asset prices, including easing of domestic firms’ default swaps.”

With the Centre gradually opening up the country following an almost three-month lockdown to check the virus, the Indian economy may start expanding by the end of March 2021, DBS Group Holdings said in a report on July 7. Goldman Sachs Group said in a report earlier this month that investors shouldn’t adopt “a broad negative stance on India credit based on economic fundamentals”.

The bank added longer-dated bonds of Indian issuers to its preferred sectors among Asian investment-grade debt, but said it saw little value in junk notes from the borrowers.

THE COST TO INSURE AGAINST NONPAYMENT BY A BASKET OF FIRMS DROPPED BY 252 BPS IN MAY AND JUNE COMBINED, THE MOST FOR ANY TWO-MONTH PERIOD DATING BACK TO 2009