Tight liquidity raises corporate sector's vulnerability: Crisil

The recent steps by the Reserve Bank of India (RBI) to tighten liquidity, against the backdrop of sharp rupee volatility, will delay economic recovery and add to corporate India's challenges, says research agency Crisil, in an analysis on the likely impact of these measures on economic growth, sectoral demand, and the credit quality of corporates and financial institutions. 

''Credit quality of corporates is likely to be weakened by slow growth  in GDP, heightened currency volatility, and higher-than-expected interest rates," says Roopa Kudva, managing director and chief executive officer, Crisil.  

"Specifically, stress will increase in sectors such as  power, construction, engineering, and steel, and lead to higher non-performing assets (NPAs) in the banking system.''

Crisil believes that India's economic recovery will take longer than previously expected.

Mukesh Agarwal, president, CRISIL Research, says, ''We have lowered India's GDP forecast for 2013-14 (refers to financial year, 1 April to 31 March) by 50 basis points to 5.5 per cent, given the reduced likelihood of interest rate cuts and weak momentum in both industry and services.'' 

In contrast with 2009, the global environment is much more stable today, and challenges  for India's economy are mainly domestic. Industrial growth plummeted to a 20-year low of 1 per cent in 2012-13, growth in private demand slowed down to  a 12-year low of 4 per cent, and private corporate investment continues to be weak.