ICRA sees strong credit quality despite macroeconomic headwinds

India Inc. entered the second half of FY27 with strong credit profiles despite a moderation in rating activity, rating agency ICRA said in its latest credit outlook. The credit ratio, which measures the proportion of rating upgrades to downgrades, stood at 3.2 times in H1 FY27, up from 2.8 times in H1 FY26 and 3.1 times in FY26. It remained well above the 10-year average of 1.5 times. 

The annualised upgrade rate moderated to 14% from 17% in FY26 while the annualised downgrade rate declined to a multi-year low of 4%, indicating continued resilience in underlying credit quality despite geopolitical and macroeconomic challenges. 

“Indian corporates enter H2 FY27 from a position of strength, supported by healthy balance sheets and substantial liquidity buffers. Looking ahead, elevated crude oil prices, deficient monsoon rainfall and rising inflation are expected to moderate consumption growth, particularly across rural-linked and discretionary sectors. However, strong corporate balance sheets should cushion the impact and prevent it from translating into broad-based credit stress. Nonetheless, renewed US tariff uncertainty adds another layer of risk for export-oriented sectors,” said K. Ravichandran, executive vice president and chief rating officer, ICRA. 

Upgrades driven by stronger business profiles 

ICRA’s rating performance remained robust, with the default rate at 0.04% in H1 FY27 and no investment-grade defaults. The agency’s average default recognition rate over the past five years stood at 93%, indicating strong rating accuracy. The annualised rate of large rating changes, defined as movements of three or more notches, fell to a decade-low of 0.4%. 

Upgrades were driven largely by entity-specific factors, including stronger business profiles, improved parent credit quality, lower project risks, and deleveraging through equity infusion and scheduled debt repayments. 

Power, real estate, auto components, finance, and capital goods, which together account for around half of ICRA’s rated portfolio, contributed about 50% of all upgrades. 

Crude, weak monsoon to weigh on growth 

Renewed escalation in West Asia has pushed the Indian crude basket to $116 a barrel in September, 68% above its pre-conflict level, ICRA said. With traffic through the Strait of Hormuz down around 95%, higher energy and commodity import costs, coupled with rupee depreciation, could pressure corporate margins and household purchasing power. 

West Asia-linked exports and remittance inflows also remain vulnerable. Strong El Niño conditions resulted in a monsoon rainfall deficit of around 12% from the long-period average. Reservoir storage stood at around 71% of full capacity as of September 24, compared with around 90% a year earlier, increasing risks to rabi output. 

Retail inflation is expected to average 5% in FY27, compared with 2.1% in FY26. If crude prices remain elevated, ICRA expects two 25-basis-point repo rate hikes in October and December 2026. 

Credit stress likely to remain granular 

ICRA expects growth to moderate in H2 FY2027 as weaker rural demand and higher interest rates and commodity costs weigh on consumption. While GDP growth was 7.8% in Q1 FY2027, the agency expects full-year growth at 7.1%. 

Rural-linked sectors such as tractors, two-wheelers and FMCG are expected to record slower but positive volume growth, partly due to a high base following the GST rationalisation-led demand surge in H2 FY2026. Discretionary segments such as automobiles, consumer durables, fashion retail, travel and quick-service restaurants could also see moderation. 

“Slower growth does not imply contraction. Volumes across most rural-linked and price-sensitive sectors should continue to grow, while corporate credit profiles remain comfortable. ICRA, therefore, expects any emerging stress to remain granular rather than systemic. The banking system's healthy asset quality and capitalisation also provide substantial capacity to absorb stress while continuing to support credit growth,” Ravichandran said. 

US tariff uncertainty adds to risks 

US tariff uncertainty remains an additional risk for export-oriented sectors. Russia accounted for around one-third of India’s crude oil imports over the past three years, with the share rising to 44% in the first four months of FY27. Any additional US tariffs linked to Russian oil purchases could weigh on Indian exporters. 

Generic pharmaceuticals face a separate tariff risk, with a US proposal envisaging a 100% tariff on generic pharmaceutical imports from August 2028, rising to 200% from August 2029. The US accounts for around 35% of India’s pharmaceutical exports.