by NR INDRAN / INT

Mumbai : Fitch Ratings expects Indian corporates’ volume growth to slow during H211 in light of monetary tightening and inflationary pressures.

Sectors likely to be affected are autos, auto ancillaries and real estate, with construction expected to be impacted over the next 12-18 months. However, the moderation in growth for most credits will remain within Fitch’s tolerance zone, and this is unlikely to have a rating impact during 2011.

The agency has maintained its stable outlook on the Indian corporate sector as at the beginning of the year. However, the outlook on the auto ancillary and retail sectors has been revised to stable from stable-positive due to the above factors.

Further, the outlook on textile yarn manufacturers has been revised to negative from stable-negative to reflect the double impact of a drop in yarn prices and high cost cotton inventory. That said, Fitch has maintained its negative outlook on cement, shipping and public sector telecom companies in India.

Fitch has not seen any visible slowdown in capex plans for most of the large corporates it rates, despite high interest rates and the risk of lower demand.

In fact, most large corporates have been moving away from a policy of liquidity preservation to liquidity deployment (in certain cases by acquiring overseas assets). However, regulatory and political risks could have a significant impact on the overall investment climate. The continuing uncertainty around euro-zone debt and a slowdown in US growth rates could also potentially change the investment climate over the next nine to 12 months.

Strong domestic demand and continuing inflation and liquidity pressures in 2011, after the economic downturn in 2009 and a sharp recovery in 2010, are reflected in the almost same number of upgrades and downgrades in the first seven months of the year.

Owing to continuous risks of high inflation and global uncertainty, Fitch believes that there is an outside chance that the number of downgrades could outpace upgrades over the rest of the year, especially if systemic liquidity becomes tighter than presently expected.

A report providing an update on the overall outlook for the corporate sector while summarising the performance, trends and outlook for the key sectors is available on www.fitchratings.com or by clicking on the link above.

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