Strong balance sheets shield India Inc. from West Asia, weather risks: Crisil

Crisil Ratings’ credit ratio, which measures the proportion of rating upgrades to downgrades, improved to 2.18 times in the first half of FY27 from 1.50 times in the second half of FY26, signalling continued resilience in corporate credit quality despite geopolitical uncertainty and supply chain disruptions.

There were 464 rating upgrades and 213 downgrades during the period, while the reaffirmation rate remained steady at around 81%. The upgrade rate of around 13% was marginally above the decadal average of 11%, while the downgrade rate of around 6% was in line with the long-term average.

Nearly 40% of the upgrades came from infrastructure and allied sectors, including roads, renewables, capital goods and secondary steel, supported by sustained government spending on infrastructure.

Downgrades were concentrated in ceramics and polyester textiles. Ceramic companies, particularly those with weaker liquidity, faced pressure from supply chain disruptions and softer export demand. In polyester textiles, rising competition from Chinese polyester yarn imports weighed on domestic producers despite healthy end-user demand.

West Asia conflict impact remains contained

The West Asia conflict and resulting trade and supply chain disruptions have persisted for seven months. However, Indian companies have adapted by diversifying sourcing channels, reconfiguring logistics networks and selectively passing on higher costs.

Strong balance sheets have also helped contain the impact, with the median debt-to-equity ratio of rated companies at around 0.5 times.

“These strengths, operational adaptability and robust balance sheets, have been reinforced by strong domestic demand, recovering exports and targeted policy support, such as Emergency Credit Line Guarantee Scheme 5.0,” said Subodh Rai, managing director, Crisil Ratings. “Together, they have enabled companies to partially, and in some cases fully, pass on cost increases and manage cash flow pressures,” he added.

Crisil Ratings’ latest assessment covers 34 sectors directly exposed to the West Asia conflict, accounting for around 65% of rated corporate debt. The assessment assumes disruptions persist through the third quarter of calendar 2026, with Brent crude averaging $88-$93 a barrel and the rupee averaging ₹94-₹97 to the dollar during FY27.

The agency evaluated sectors on their ability to pass through higher input, fuel and logistics costs, the strength and sustainability of demand, and balance sheet strength.

Of the six sectors identified as impacted in its June 2026 assessment, three have now moved to a stable credit quality outlook. In ceramics, the gradual restoration of energy supplies and healthy domestic demand from the real estate sector have supported a recovery in operating performance.

Three sectors continue to face elevated pressure. Diamond polishers remain under a negative credit quality outlook due to weak export demand and competition from lab-grown diamonds. Polyester textiles have a moderately negative outlook because of elevated crude-linked input costs and increased import competition. Specialty chemicals also have a moderately negative outlook as low-priced Chinese supplies could constrain pricing flexibility and pressure margins, particularly in export markets.

“If the conflict persists beyond current assumptions, vulnerabilities could emerge in a few additional sectors currently assessed as resilient,” Crisil Ratings said.

Rural demand, financial sector remain key monitorables

Weather-related risks have also emerged as an important monitorable. Cumulative rainfall has been around 12% below normal, although regional variations remain significant. Crisil expects the impact on overall rural demand to remain limited this fiscal, supported by diversified rural income, policy measures and four consecutive years of favourable monsoons.

Corporate balance sheets remain a key buffer, with a median debt-to-equity ratio of 0.5 times providing headroom to absorb higher costs while maintaining debt-servicing capacity.

In the financial sector, bank credit growth is expected at 14.5%-15.5% in FY27, marginally higher than around 14.5% last fiscal. MSME and retail lending are expected to remain the key growth drivers, while easing liquidity supported by Foreign Currency Non-Resident (B) deposits should reduce pressure on domestic deposit growth.

Gross non-performing assets are expected to remain below 2% by the end of FY27. Non-banking financial companies are expected to record 18%-19% growth in assets under management, driven by gold loans, loans against property and a measured recovery in unsecured lending.

“Globally, policymakers are turning more hawkish as inflationary pressures rise. The impact of higher policy rates on consumer demand will be a key monitorable,” said Somasekhar Vemuri, senior director, Crisil Ratings. “Even amid these headwinds, strong balance sheets across both the corporate and financial sectors provide a significant cushion and underpin our stable credit quality outlook,” he added.