India Inc's Credit Quality Holds Firm, But Global Risks Loom Large

Amid the emerging geo-political environment, the credit ratio for the manufacturing and services sector in India improved to 2.06 times in the second half of FY26, up from 1.72 times in H1 FY26. The credit ratio for Banking, Financial Services, and Insurance (BFSI) sector improved to 2.25 times - up from 2.10 times in H1FY26, marking a recovery from the stress-driven lows of H2FY25.

CareEdge Ratings' Credit Ratio, which measures the proportion of rating upgrades to downgrades, stood at 1.93 times in the second half of fiscal 2026, lower than 2.56 times observed in the first half.

During this period, 363 entities were upgraded and 188 were downgraded. While the credit ratio remains above the 10-year average of 1.55, the moderation suggests early signs of stress amid a more challenging environment.

Nevertheless, reaffirmations remained high at 80 per cent, indicating that the bulk of the rated universe continues to hold its ground even as the external environment grows more complex, the findings showed.

"CareEdge estimates that if crude oil were to average $100 per barrel in FY2027, GDP growth could moderate to 6.5 per cent, while inflation may rise to 5.1-5.3 per cent," said Sachin Gupta, Executive Director and Chief Rating Officer, CareEdge Ratings.

While domestic policy measures and relatively stronger corporate balance sheets provide some cushion, the critical question is whether these domestic levers will be sufficient to keep credit quality on course if the global environment deteriorates further.

"For now, the answer leans towards yes - but the margin for comfort is narrowing," he mentioned.

The upgrades during H2 FY26 were fairly broad-based, with key sectors driving the momentum being pharmaceuticals, auto ancillaries, real estate leasing, mid-sized entities in capital goods and agricultural food products, along with hospitality and healthcare in the services space.

"Looking ahead, the sudden outbreak of conflict in West Asia has introduced sectoral vulnerabilities that did not exist around a month ago. Industries like airlines, ceramics, chemicals, glass, fertilizers, oil marketing companies, basmati rice exporters, packaging, tyres, synthetic textiles, gas distribution, cement, paints, semiconductor and electronics, auto ancillaries, and hospitality - face earnings headwinds if the West Asia conflict prolongs," explained Ranjan Sharma, Senior Director, CareEdge Ratings (Corporate Ratings).

Turning to infrastructure, the credit ratio normalised to 1.67 times in H2 FY26, from the elevated 8.54 times in H1FY26. This normalisation is primarily a reflection of the base effect - H1FY26 had been significantly inflated by a large volume of bulk portfolio rating actions, including ownership changes to stronger sponsors and bulk transfers to Infrastructure Investment Trusts, which were episodic in nature.

If the global conflict deepens and trade flows continue to restructure, the resilience of credit profiles will be tested in the months ahead, said the report.

- IANS