Rating agencies downgraded a higher share of financial instruments in May than at any point since August 2021, according to data from the Centre for Monitoring Indian Economy (CMIE). Around 18.49% of instruments saw downgrades in May, compared to 15.32% in April and less than 10% in January. The provisional CMIE data for May covers 8,381 instruments, with approximately 1,550 being downgraded. These financial instruments are typically bonds that companies issue to raise money for business purposes, with specialized agencies providing ratings on their ability to repay borrowings.
The latest scenario analysis from the Bank of England reveals the extent of potential stress across private markets globally. Sterling and US dollar high-yield corporate bond spreads peak at around 1,200 basis points in year 2, with total borrowing costs reaching approximately 1,800 basis points, bringing conditions broadly in line with borrowing costs during the Global Financial Crisis. The analysis shows that corporate revenues continue to fall and defaults rise materially, with the largest impacts felt across cyclicals and technology sectors. AI development is hit by higher energy prices and shortage of key hardware components, increasing costs for users and slowing development of new models, limiting near-term productivity gains from artificial intelligence.
The downgrades likely reflected the worsening situation as the Iran conflict entered its third month in May, but recent developments show signs of improvement. As reported by Business Standard, the US and Israel attacked Iran in February, leading to higher energy prices and affecting trade. However, a provisional agreement between the US and Iran and a promise to open the Strait of Hormuz for at least 60 days has led to a sharp fall in oil prices to below $80. With oil prices now trending back to normal conditions, the geopolitical risk premium has fallen and disinflation expectations have risen. Even so, uncertainty lingers over the precise clauses in the final agreement, particularly regarding Iran's nuclear programme and regional stability.
Independent market expert Dwijendra Srivastava noted that supply costs have risen because of the war, affecting companies without pricing power. According to Business Standard, he expects the situation may improve with an end to the conflict, though domestic headwinds remain. The El-Nino weather phenomenon may affect rainfall and risks potential rural distress, while the possibility of job losses due to artificial intelligence may affect demand. However, the end of the Iran conflict may provide temporary relief, though supply issues may take some months to normalize. The latest scenario analysis suggests that corporate stress will persist even after the immediate crisis, with many companies continuing to experience difficulties due to high refinancing needs and weak economic recovery.
Despite current challenges, corporate balance sheets have shown improvement in recent years. According to CMIE data cited by Business Standard, non-financial companies' debt-equity ratio was at its lowest in at least 17 years, dropping to 0.42. The interest coverage ratio, which measures ability to meet interest payments for the non-financial sector, touched a 16-year high of 5.5 in FY26. However, the latest scenario analysis reveals that private markets face significant challenges with semi-liquid structures facing increased redemption requests exceeding offered limits. Rated alternative asset managers are downgraded by two notches by year 3, with private real estate funds heavily impacted and some open-ended property funds limiting quarterly redemptions due to investor requests.
