Mumbai: Rating agencies remain largely confident in the credit quality of Indian companies so far, but have grown cautious about potential financial stress if the West Asia war drags on.
The second half of FY26 (October-March) saw some easing in tariff-related risks. The India-EU trade deal combined with GST rate cuts, income tax relief, easing inflation and transmission of policy rate cuts improved the credit outlook for Indian companies, they said.
“These developments had strengthened the outlook for Indian corporates entering 2026-27. However, the escalation of hostilities in West Asia since late February 2026 has reintroduced risks, particularly for India’s energy and food security,” said K. Ravichandran, executive vice-president and chief rating officer, Icra, said in a statement.
As such, with FY26 already seeing a rise in the rate of corporate downgrades due to tariff-related pressures and geopolitical tensions, rating agencies are now worried that a prolonged West Asia war could further put pressure on companies’ balance sheets.
“FY26 credit profiles do not reflect even incipient stress from the evolving conflict, as the escalation materialised only in the closing month of the financial year. However, as the conflict continues to escalate, the five years of balance sheet strengthening that corporate India has undertaken since FY21 will be tested in FY27,” said Arvind Rao, senior director, head of credit policy group, India Ratings.
FY26 ratings trends
The credit ratio for Crisil Ratings, a measure of the proportion of rating upgrades to downgrades, moderated to 1.50 times in the second half of FY26 from 2.17 times in the first half of the fiscal year. A credit ratio of 1.5 indicates that for every downgrade, there were 1.5 upgrades.
The upgrade rate declined to 10.6% from 14.0% in the previous half, aligning with the 11% average of the past decade. On the other hand, the downgrade rate edged up to 7.0% (6.4% in the first half), a tad higher than 10-year average.
Care Ratings’ credit ratio fell to 1.93 times in the second half of FY26 from 2.56 times in the first half. The downgrade rate, at 7%, was below the long-term average of 10%.
“While the credit ratio remains above the 10-year average of 1.55, the moderation suggests early signs of stress amid a more challenging environment. The moderation in upgrades, from the long-term average of 15% to 13% in the current period, suggests that improvement in credit profiles is becoming more selective,” Care Ratings said in a press release.
India Ratings’ upgrade-to-downgrade ratio too dipped to 3.1 from 3.5 in FY25, with defaults edging up to 0.8% compared with 0.6% in the previous year. The agency attributed this to a pick‑up in downgrades to about 4% from 1.5% last year rather than any “significant erosion in credit quality among better‑rated issuers”.
Credit agencies said that a prolonged US-Iran conflict could constrain the supply of oil, gas and fertilizers, triggering global supply shocks. Moreover, corporates could face a moderation in domestic demand and pressure on margins due to rising inflation.
Rating upgrades were led by sectors such as pharmaceuticals, auto ancillaries, real estate leasing, mid-sized entities in capital goods and agricultural food products, driven for the most part by entity-specific factors, including strengthening business profiles, improvement in parent credit profiles, reduced project risk, particularly in power and roads, and enhancement in financial profiles through equity infusions or debt reduction via scheduled amortisation. Hospitality and healthcare services saw upgrades due to improving sector-specific dynamics whereas infrastructure and related sectors such as construction and engineering, roads, renewables, capital goods also saw upgrades.
On the other hand, downgrades were seen in small-sized commodity trading and distribution entities, seafood exporters, and paper and paper product companies. The chemical sector continued to face pressure from the twin forces of Chinese dumping and weak global demand, the agencies said. Microfinance companies and related lending entities as well as select chemical segments also contributed to downgrades.
FY27 outlook
With the conflict in West Asia introducing sectoral vulnerabilities, industries like airlines, ceramics, chemicals, glass, fertilizers, oil marketing companies, basmati rice exporters, packaging, tyres, synthetic textiles, gas distribution, cement, paints, semiconductor & electronics, auto ancillaries, and hospitality could face earnings headwinds, they said, adding that MSMEs, in general, are likely to be the most vulnerable to these shocks.
India’s external vulnerability remains elevated due to its import dependence, with around 45% of the import basket comprising oil and gas, gold, diamonds and fertilizers.
“This dependence is further accentuated by high regional concentration, with a significant share of these imports sourced from West Asia,” Icra said, adding that spillover risks could arise through trade and remittances as the region accounts for nearly 15% of India’s exports and around one-third of inward remittances.
Crisil Ratings, in a release, said defence, infrastructure and healthcare sectors should continue to see improvement in credit profiles. The West Asia conflict, however, would increase cost pressures and necessitate realignment of supply chains for India Inc.
“Amid this, India Inc’s credit quality outlook for fiscal 2027 is stable but cautious,” the rating agency said.
As per a stress test of 30 sectors accounting for 65% of CRISIL’s rated portfolio, 23 of these 30 sectors are expected to see “limited impact on credit profiles” because of the conflict despite higher input prices and disruption in gas supply.
However, the impact could be “moderately negative” for airlines, crude-linked sectors such as polyester textiles, specialty chemicals and flexible packaging manufacturers, auto component makers, and diamond polishing. The one sector that could be “hit the hardest” would be the ceramics sector given its significant reliance on gas. On the other hand, upstream oil companies would stand to benefit due to higher crude oil prices translating to more revenue, while costs are fixed.
