Fixed-Income Investor Survey 2QFY17: Investors are concerned that geopolitical tension could upset credit markets globally. 29% of investors ranked this as a high risk in FY17. India Ratings and Research (Ind-Ra) believes the survey results reflect broader investor concern over high-profile global sources of risk such as Brexit, uncertainty of the future of EU, debt and forex volatility as a fallout of the globally protracted crises, rather than domestic issues.
Ind-Ra believes post Brexit, while the Indian currency has stabilised, the actual process of Brexit will impact not only global growth, but also on capital flows, which will have implication on the Indian currency. Global growth is likely to remain weak, which will impact India’s trade and the current account.
Investors believe the most important domestic factor to watch out for in FY17 is the progress of monsoon. 24% of investors rate monsoon as the key factor to watch out. Ind-Ra believes that despite the favourable prospects for agriculture due to an above normal monsoon in 2016, industrial recovery is proving to be a drag on the FY17 growth prospects.
The impact of a good monsoon will start to reflect from 2HFY17. At the same time the impact of the pay hikes of central government employees will also get reflected in the second half, however, the full impact will only be realised after salary revisions by state governments, urban local bodies, public sector undertakings and universities.
Respondents believe that the deterioration in asset quality of banks poses the highest risk to credit markets in FY17. 85% of investors surveyed expect the further rise in banks’ bad loans to pose a high risk to credit markets and to be the main risk to bank credit quality. Ind-Ra believes that even post the asset quality review (AQR), NPA aging will keep the pressure on public sector banks in the form of higher credit costs. While the headline GNPL ratios may not move significantly, the high proportion of stressed assets will continue to hinder their ability to grow and participate constructively in the credit market.
Majority investors expect the bad loan stress in the banking system to end by FY18. However quiet a large number of investors expect the stress to continue, with 26% expecting the stress to continue and end only in FY19 and 22% expect the stress to end after FY19. Ind-Ra expects stress to linger through FY18/19, although the slippages are likely to come down in FY17/18 compared to FY16. Post AQR many large corporates in the deeply stressed cyclical sectors have been provisioned for with higher cover.
The threat from non-fund exposures of banks however continues to remain. A large proportion of unprovided stressed corporates belong to the infrastructure sector, where schemes like Scheme for Sustainable Structuring of Stressed Assets (S4A) can prove to be useful in stress resolution. Ind-Ra also expects corporate capex to pick up meaningfully only from FY19 onwards.
Investors expect credit conditions for corporates in India to deteriorate somewhat in FY17. 52% of investors expect fundamental credit conditions for corporates to deteriorate, however majority expect credit conditions of NBFCs and infrastructure projects to improve somewhat.
Investors are concerned about the refinancing challenges that will be faced by emerging corporates with turnover of less than INR5bn. 42% of investors believe that emerging corporates will face refinancing challenges in FY17.
Investors choose government securities (G-sec) over all other assets and least prefer to hold on to cash in the current market. 34% of investors rank G-sec as the most preferred asset to invest into relative to others. Ind-Ra believes investors will remain relatively credit risk averse in 2016. Ind-Ra maintains a constructive view on government bond yields.
This is driven by the favourable demand-supply conditions due to the durable liquidity injection by RBI and the fall in the short end of the yield curve due to liquidity easing. Ind-Ra expects the RBI to continue with its easing stance in the foreseeable future.