Key Points

ICRA stated in the report that its rating actions in the first half of FY2026 underscore the strength of India Inc.'s balance sheets and the supportive domestic business environment.

During H1 FY2026, ICRA upgraded the ratings of 214 entities while downgrading 75, resulting in a robust Credit Ratio of 2.9x.

This marks a significant improvement over the Credit Ratio of 2.0x in FY2025 and 2.2x in H1 FY2025.

"The imposition of steep 50 per cent tariff on Indian exports to the US presents a significant challenge for exporters, particularly in sectors such as cut & polished diamonds (CPD), textiles, and seafoods, which are heavily reliant on the US market. However, the domestic-focused nature of the Indian economy is expected to limit the broader macro impact posed by higher US tariffs. Domestic consumption is likely to receive a boost from GST rate rationalisation, income tax relief, transmission of rate cuts, and easing food inflation, particularly aiding urban demand, which has seen uneven recovery thus far," said K Ravichandran, Executive Vice President & Chief Rating Officer, ICRA.

"In view of these positive domestic trends, ICRA has revised its GDP growth forecast for FY2026 upward by 50 basis points to 6.5 per cent, helping to cushion the adverse effects of the US tariffs. That said, the potential extension of protectionist measures to the services sector remains a key monitorable. If enacted, the proposed HIRE Act could significantly disrupt India's outsourcing industry, given its substantial reliance on the US market," Ravichandran added.

Rating upgrades in H1 FY2026 were largely driven by entity-specific factors such as the improvement in business fundamentals, strengthening of the parent's credit profile, and reduced project risks in sectors like power and roads.

Key business drivers included market share expansion, order book growth, operating leverage from scale, and favourable shifts in product mix and cost structures, it added.

Industry-specific factors also influenced rating actions, notably in the hospitality, microfinance, and chemical sectors. Power, realty and hospitality sectors, which make up a quarter of ICRA's portfolio, contributed to half of the rating upgrades.

Credit conditions remained benign, with a low default rate of 0.2 per cent in H1 FY2026. Of the six defaults, only one was investment-grade, involving an NBFC focused on MSME lending that faced liquidity stress due to covenant breaches. The Large Rating Change Rate (LRCR), defined as ratings upgraded or downgraded by three or more notches, stood at a low 0.8 per cent (annualised), well below the five-year average of 1.5 per cent.

The rating agency further added that the corporate balance sheets have strengthened significantly over the past decade. The Total Debt-to-OPBDITA ratio declined from 3.4x in March 2016 to 2.1x in March 2025, while the proportion of cash and current investments relative to total debt improved from 32 per cent to 46 per cent.

Despite a strong 13 per cent CAGR in capex over the past five years, higher operating cash flows have helped reduce reliance on debt and strengthen liquidity. On average, cash and current investments have been nearly twice the annual capex, giving companies the flexibility to scale up investments without straining their financials.

In the financial sector, asset quality pressures in retail and MSME segments slowed the growth for private banks and NBFCs in FY2025, and these are expected to persist in FY2026.

Although the incremental bank credit growth this year trails last year's pace, the pick-up in economic activity following the GST rate cuts is likely to support credit growth. Bank credit is projected to grow by 10.4-11.3 per cent YoY, while NBFC credit (excluding infrastructure-focused entities) may expand by 15-17 per cent, similar to the FY2025 levels.

"Looking ahead, domestic consumption and the Government's sustained focus on infrastructure development are expected to remain the primary growth drivers, amidst global uncertainties and rising protectionist measures. Rural demand is expected to stay firm, supported by a positive outlook for the ongoing kharifseason. Urban consumption is also expected to gain momentum, supported by the recent GST rate rationalisation," the ICRA added in the report.

- ANI