“Corporate India’s strong economic moat, developed since the pandemic, continues to safeguard credit profiles against relentless geo-political and economic uncertainties,” said Arvind Rao, senior director, head of credit policy group at India Ratings, adding that all these headwinds should have “collectively dented the credit profiles” but there has been a minimal impact on credit quality, restricted to a few mid-corporate entities in certain industries.
Credit profiles were bolstered by favourable domestic macroeconomic factors, including near-decade low inflation, a 100 basis points reduction in interest rate, above-normal monsoons and consumption-supporting policy measures such as lower income tax and reduced goods and service tax (GST), the credit rating agencies said.
Crisil said its upgrade rate of 14% outpaced the average of 11% over the past decade, with most credit upgrades being seen in infrastructure and related sectors, such as construction and engineering, roads, renewables, capital goods and secondary steel. The downgrade rate at 6.4% for H1 FY26 was in line with the 10-year average, with downgrades being led by export-linked sectors, such as diamond polishers, shrimp exporters and home textile manufacturers, which bore the brunt of US tariffs.
Upgrades for the other agencies were also seen in sectors such as commercial realty, auto & auto components, consumer services, consumer services such as education institutions, hospitality, healthcare and consumer durables.
Downgrades were seen primarily in sectors as basic chemicals, small-sized auto and auto ancillaries, trading and distribution firms and ceramic manufacturers. Some FMCG companies saw pressure on profitability amid rising operating expenses, increased competition, elongated working capital cycles, and some in financial services due to deterioration in asset quality in the MFI business and pressure on profitability amid higher credit costs.
Crisil upgraded 499 entities and downgraded 230 during the period. Icra upgraded the ratings of 214 entities and downgraded 75, whereas India Ratings upgraded the ratings of 181 issuers and downgraded 57 issuers. CareEdge Ratings saw 282 upgrades and 110 downgrades.
India Ratings said that corporates’ balance sheet integrity was preserved by delaying the much-anticipated capex cycle amid demand uncertainties, while business expansions relied on internal accruals and equity. Accordingly, large corporates and top rated corporates saw the highest upgrades whereas slightly vulnerable mid-corporate issuers showed increased weakness reflected in a higher pace of downgrades.
Outlook
Going into the second half of the year, the infrastructure and construction sector is seen benefiting from diversified order books, predictable cash flows, hospitality from rising momentum in leisure and business travel, and FMCG from sustained demand led by improved domestic consumption and increasing premiumisation.
On the other hand, tariffs imposed by the US will weigh on the credit quality of some export-linked sectors such as diamond polishers, shrimp exporters, home textile makers, and to some extent chemicals and capital good makers, given that the country accounts for 20% of India’s merchandise exports—and significantly more for some of the impacted sectors.
“The imposition of steep 50% tariff on Indian exports to the US presents a significant challenge for exporters, particularly in sectors such as cut & polished diamonds, textiles, and seafoods, which are heavily reliant on the US market,” said K. Ravichandran, executive vice president & chief rating officer, Icra.
The US is estimated to account for nearly 20% of India’s exports, of which 50–60% are now vulnerable, ICRA said, adding that merchandise exports could contract by 4–5% YoY in FY26 if the higher tariffs persist through March 2026.
Sachin Gupta, executive director and chief rating officer, CareEdge Ratings, said that while India Inc.’s performance improved in H1FY26, the external environment is turning “more complex by the day”. “Sharp escalation in US tariffs is reshaping trade flows and supply chains, creating challenges for Indian companies and keeping private sector capex in abeyance until there is greater clarity on demand,” he said, adding that export-heavy sectors may face margin pressures in the near term in addition to second-order effects—such as weakening competitiveness, diversion of capital from export-linked industries, and slower investment flows.
“To be sure, frontloading of revenues by exporters in the first half will mean the full impact of the tariffs may not be visible this fiscal,” Crisil said, adding that other restrictive measures such as a substantial hike in H-1B visa fee may not impact profitability significantly, particularly for the IT sector as companies recalibrate their resource strategies.
Financial services
Financial services were a mixed bag in H1 FY26 wherein credit quality for most banks was largely stable but rise in stress was seen for some NBFCs, small finance banks and microfinance institutions.
On the other hand, some upgrades were driven by healthier financial risk profiles of banks and Housing Finance Companies, along with improvements in select groups across other financial services.
For FY26 as a whole, credit quality outlook for banks and non-banks is expected to remain steady, with credit growth expected to pick up in the second half aided by lower interest rates, reduction in policy rates and improved consumption driven by rationalisation of the GST rates and income tax cuts. Asset quality of banks and non-banks is expected to be steady, even as pockets of vulnerability remain such as MSME, unsecured and microfinance and export-oriented segments.
The agencies’ peg bank credit growth for FY26 10.4–11.3% whereas NBFCs’ loan books are seen growing by 15-17%.
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