In a bid to curb the rising pressure of inflation, leading rating agency Crisil expects that the Reserve Bank of India (RBI) would adopt more measures to tighten the money market in the upcoming monetary policy. “There will be more tightening measures adopted by the central bank during the monetary policy. However, I cannot say which route they would opt for. Inflation is mainly fuelled by rising crude and commodity prices,” said Roopa Kudva, managing director, CEO, Crisil. Kudva was speaking on the sidelines of a press conference announcing a tieup between Crisil, ICICI Foundation, and the IMFR Trust, for the cause of social upliftment. However, Kudva believed that inflation would reach moderate levels by the last quarter of 2008-09.
“All the fiscal and monetary measures taken by the government will definitely help curb the pressure of inflation. But there it will take some time for the measures to take effect,” said Kudva while adding that he expected inflation to average to about 8.50%-9% for the financial year 2008-09.
Talking about the banking sector, Kudva said that the profitability of Indian banks would suffer a major setback in 2008-09 due to the increase in non-performing assets (NPAs) and the rising cost of funds.
“We expect NPAs to touch 4-4.1% in 2008-09 as against 2.4%, last year. NPAs will grow mainly on the retail side, and that too in the personal-loan segment. This is mainly due to high interest rates and increased exposure to high-risk customers,” she added.
When further probed about the corporate India’s resource-raising program, Kudva remarked that it would now get very challenging for Indian companies to raise funds, given that the current scenario did not look favourable for acquiring of the requisite funds.
“Raising funds has become a major challenge due to the increase in their cost. However, there is still an appetite to fund good projects,” Kudva explained.
Nevertheless, despite a slowdown in the growth-rate, Kudva said that the economy hadn’t witnessed a sharp slowdown in investments, so far. “We still haven’t seen a fall in investments. Corporates are going ahead with their plans,” she said. “The economic growth of the country is expected to slowdown to 7.80% during 2008-09,” Kudva forecasted.
Meanwhile Standard & Poor’s has said that inflation vigilance was on the rise, following a benign period when central banks did an excellent job of managing inflation expectations since 2002.
In an article an article titled Global Credit Comment: Inflation Bares Its Fangs, Adding To Credit Snarl (Premium) S&P stated that this risk was of particular concern to fixed-income investors, where sensitivity to inflation ran high.
For businesses in particular, the rise in inflation was likely to result in compressed corporate margins, as input prices soared without the ability to pass the increase fully onto the end-user amid an economic slowdown. Further, rising inflation was likely to apply pressure on yields and spreads, while lowering nominal returns for holders of corporate bonds vis-?-vis other securities that offer a hedge against inflation.
