India’s credit quality is expected to remain resilient in fiscal 2026 despite heavy pressure on export-oriented sectors from steep US tariffs, ratings agency Crisil said in its half-yearly outlook on Tuesday.
The agency reported a credit ratio – the number of upgrades to downgrades – of 2.17 times in the first half of the fiscal year, down from 2.75 times in the same period last year, but still reflecting broad-based balance sheet strength and government-led infrastructure spending.
“While domestic drivers remain strong, particularly infrastructure investment and robust consumption demand, US tariffs are weighing significantly on export-linked sectors,” Crisil said in its presentation, noting that about USD 50 billion worth of shipments are vulnerable.
The United States, India’s largest single-country export market, imposed 50 per cent tariffs on key Indian goods earlier this year, the highest among peer nations. Merchandise exports to the US touched USD 87 billion in fiscal 2025, making up one-fifth of India’s total shipments and 2.2 per cent of GDP. Crisil estimates that nearly half of this trade is now exposed.
Diamond polishing, shrimp, textiles, home furnishings and agrochemicals are among the most affected sectors. Exporters face weakening demand, margin compression and liquidity challenges, with some companies forced to explore relocating production or rerouting supply chains through other geographies.
“The ability to divert sales to alternative markets is limited in the near term, as capacity ramp-up outside the US will take time,” Crisil warned, adding that exporters are resorting to measures such as shipping intermediate goods to third countries for final assembly.
The agency also flagged potential second-order effects, including competing nations dumping excess volumes in India or diverting sales to other markets where Indian companies are active, further eroding earnings.
Despite these headwinds, Crisil said India’s overall outlook remains resilient, supported by a steady domestic economy. GDP growth is projected at 6.5 per cent in fiscal 2026, underpinned by tax cuts, lower inflation and easing monetary policy. The agency highlighted that corporate balance sheets remain deleveraged, with median interest coverage expected to improve to over 5 times this year, cushioning against volatility.
Sectors linked to infrastructure continue to benefit from the government’s capital expenditure push. Roads, renewables and construction projects recorded strong upgrades due to milestone completions and revenue visibility. Hospitality, too, saw credit profile improvements on the back of robust demand and rising occupancy levels.
Banks and non-banking lenders also remain on firm footing. Bank credit is forecast to expand by 11 to 12 per cent this year, led by retail loans, while non-bank financial companies are expected to record about 18 per cent growth in assets under management. However, Crisil cautioned that non-performing assets in export-linked micro, small and medium enterprises (MSMEs) and unsecured retail lending need close monitoring.
“The reaffirmation rate of nearly 80 per cent shows portfolio resilience,” the agency said, though it emphasised that the trajectory of US trade policy and any offsetting measures by the Indian government will be critical to sustaining credit strength.
Possible mitigating steps include safeguard duties for tariff-hit sectors and pursuing a bilateral trade deal with Washington. “Support measures from the government and clarity on trade negotiations will determine the extent of stress absorption in vulnerable sectors,” Crisil said.
For now, the agency concluded, India’s domestic consumption and infrastructure momentum provide a counterweight to external shocks. But the sustainability of credit quality hinges on how quickly exporters can adapt supply chains and whether trade diplomacy reduces tariff pain.
The ratings update underlines the uneven impact of global trade tensions: while India’s macroeconomic fundamentals remain robust, sectors tied to international markets face a sharper struggle to preserve margins and cash flows. |
