Moody’s: India Needs Offshore Cash for Investment Boom

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Moody’s Ratings forecasts that Indian corporates will face sustained high capital requirements driven by capacity expansion, inorganic growth, refinancing, working capital needs, and shareholder payouts.

Vikash Halan, managing director at Moody’s, emphasizes that while India’s domestic liquidity and internal cash flows can largely cover these needs, offshore funding remains crucial despite its reduced share of India Inc.’s total funding, now down to 12%. This reduction is attributed to higher costs and increasing domestic liquidity.

Moody’s notes that non-financial corporates will encounter stiff competition from the retail sector for bank funding. Retail loans are in high demand and offer higher yields relative to corporate loans. Despite this, India’s domestic bond and equity markets, which have grown slowly over the past decade, still account for only 12% of corporate funding.

Highlighting the robustness of India Inc.’s financial health, Moody’s underscores that corporates have the capacity to take on additional debt to meet their funding requirements. Over the last decade, the corporate sector has reduced debt-to-GDP ratio from 72% to 55%, maintaining stable leverage levels.

Meanwhile, ICRA, Moody’s affiliate in India, reports steady business momentum in the fiscal year ending March 31, 2024. This growth has been supported by strong consumption and investment activities, though rural areas have been impacted by sub-par monsoons and inflation, dampening consumption. Urban-centric sectors such as residential real estate, hospitality, airlines, jewellery, and automobiles have continued to perform robustly.

K. Ravichandran, Chief Ratings Officer at ICRA, anticipates stable credit metrics for India Inc., supported by easing inflationary pressures and a steady interest rate environment. A forecast of normal monsoons is expected to bolster a tentative recovery in rural markets.

Looking ahead, ICRA expects moderate private sector capital expenditure (capex) in the first half of FY25 due to a potential pause in infrastructure activities preceding general elections. However, the medium-term outlook for private capex is positive, bolstered by a broader economic recovery and supportive policy measures like the Production Linked Incentive schemes.

Certain sectors are expected to witness stronger capex growth, notably metals, specialty chemicals, and automotive, driven by expansion plans and robust demand. Additionally, investments in green infrastructure prompted by regulatory initiatives will further support growth. Nevertheless, global macroeconomic risks pose challenges, particularly for export-oriented sectors such as bulk chemicals, cut and polished diamonds, and textiles.

Turning to the banking sector, Moody’s anticipates loan growth of 12%-14% over the next 12-15 months, in line with deposit growth. Net interest margins across the banking system are expected to selectively soften as banks adjust deposit rates upwards to reflect previous hikes in interest rates.