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India Ratings & Research (Ind-Ra) said Tuesday, benefits to companies owing to lower interest rates and a reduction in debt are likely to be reversed in the current fiscal year.
According to the report, the move will take place because of a sharp rise in interest rates and higher working capital financing needs. Ind-Ra expects that the interest burden on Indian companies can cross pre-Covid levels in terms of value, seeing an increase of 30 per cent in FY24 compared to FY22.
The rating agency also expects the cost of debt to increase across different categories irrespective of the size of the firms. The move is in sync with the interest rate regime.
A rise in interest rates and higher working capital financing is likely to increase outflows of interest to Rs 3.38 trillion in FY24 from Rs 2.52 trillion in FY22, the rating agency mentioned. However, it does not expect this to lead to a broad-based credit decline.
Ind-Ra also analysed interest costs on basis of 3,365 non-financial, debt-heavy companies with a total debt of nearly Rs 36 trillion in the first half of FY23. These companies have been segregated into six different segments on the basis of long-term and short-term debt amounts.
The rating agency commented on the interest cost and said, “Interest costs for all sectors will increase at a compounded annual growth rate of 16 per cent between FY22 and FY24. “For the top debt-heavy sectors, interest costs will rise to Rs 2.84 trillion in FY24 from Rs 2.09 trillion in FY22."
On deducing interest rates for the current financial year, the rating agency factored a 25 per cent jump in financing cost in FY24 as compared to FY22.
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Interest rate transmission for large companies gained attention in the latter half of FY23 when the Reserve Bank of India was hiking the repo rate due to the sharp decline in the banking system's liquidity. The transmission of monetary policy in the banking system could intensify in FY24 and will be driven by a sharp rise in the banks' marginal cost of funding-based lending rates, the rating agency said.
It further added, "The drawdown from the reverse repo rates in FY23 to the tune of Rs 5 trillion till FY23 has enabled banks to address a surge in the gap between incremental credit and deposit, and this will not be available in FY24. Therefore, even if the policy rate remains stable for FY24, rates in the banking system will continue to face upward pressure."
