Spreads to Widen Slightly for AAA/AA Credits & Lower Rated Entities: Ind-Ra

India Ratings and Research (Ind-Ra) believes owing to the diverging growth-inflation dynamics between advanced economies (AEs) and India, domestic interest rates more likely to be guided by domestic factors such as growth, pro-active supply side management by authorities and higher sensitivity of interest rate over aggregate demand owing to the external benchmark linked loans. However, structural factors such as the elevated supply of bonds by the central and state governments will keep the interest rate trajectory upwards in the short to medium term. In addition to that, abrupt changes in the geopolitical scenario and the subsequent impact on the business environment could lead to volatility in the financial system.

Given the geo-political challenges and supply-side constraints, risks to growth have increased. On the other hand, inflation is likely to remain the biggest challenge for the next few months amid all the geo-political tension, and consequently Ind-Ra expects the monetary policy condition to be more focused on controlling inflation and maintaining stability in the financial system and exchange rate market.

Ind-Ra's macro forecast suggests that inflation dynamics has become challenging, and the agency expects the retail inflation to average at a nine-year high of 6.9% in FY23 as opposed to average of 4.1% during FY16-FY19. Ind-Ra expects the Reserve Bank of India (RBI) to increase the policy