Credit rating agency, India Ratings and Research (Ind-Ra) in its latest report has said that India’s widening current account deficit (CAD) along with depreciating rupee may increase the borrowing costs of Indian firm. The ratings agency further noted that rising interest rates, weakening rupee and forward premium could also affect the ability of corporates to source debt capital from global markets.
As per the report, the corporate liquidity may also tighten further, which will reduce the financial flexibility. Besides, the report pointed that the external account challenges are exacerbated by capital outflows from the debt capital markets in light of heightened volatility in the rupee and bond markets, a gradual contraction of central banks’ balance sheets and rising interest rates in developed markets.
Ind-Ra further highlighted that the widening CAD is accompanied by an increase in capital outflows primarily from debt capital markets and added that this can further worsen the demand-supply mismatch in debt markets, thereby widening credit spreads over the near to medium term. It also said that widening CAD (with capital outflows) not only results in a hardening of benchmark yields, but also puts upward pressure on corporates’ credit spreads in the short and intermediate tenures.