India Ratings highlights a widening divergence in financial stability between large corporates, which are adapting through strategic shifts, and smaller firms facing increased pressure from external shocks, tighter liquidity, and higher funding costs as FY27 approaches.
India’s biggest companies are entering the second half of the 2026-27 financial year with balance sheets that still look sturdy, but India Ratings says the pressure points are moving. The agency’s more recent market notes suggest that the immediate danger is less a collapse in large-company credit quality than a squeeze on smaller borrowers as external shocks, higher funding premia and tighter liquidity begin to bite.
That split has been widening for years. In a study of roughly 3,400 listed non-financial companies, India Ratings said businesses with annual turnover above ₹5 billion had materially improved their ability to absorb volatility over the past decade, even through tariff disputes, war-related disruption and patchy domestic demand. Its stress measure for large corporates fell to 7% in March 2026 from 14% in March 2016, despite hitting 29% during the pandemic. For smaller enterprises, the ratio was 27% in March 2026, the same as a decade earlier, after peaking at 48% during COVID-19.
The rating agency argues that the difference is not simply scale, but strategic room to manoeuvre. Abhishek Bhattacharya of India Ratings said large groups had responded through “premiumisation”, “specialisation”, modular investment and diversification, while smaller businesses lacked the same flexibility. In practice that has meant a decisive shift upmarket in consumer sectors. Suppliers tied to entry-level motorcycles and small cars have been hit as demand in those categories has weakened over the past three years, while bigger auto groups have leaned harder into premium sport utility vehicles, electric scooters and precision engineering. In consumer goods, quick-commerce channels now account for 5%-6% of revenue for leading fast-moving consumer goods companies, up from less than 1% in FY21-22, helping stronger players defend margins even as distribution costs change.
The same pattern appears in infrastructure and manufacturing. India Ratings says more commoditised areas such as cement and engineering, procurement and construction have seen operating margins at market leaders fall from the high teens to single digits over five years, with stress ratios above 20%. More specialised niches have held up far better: transmission-equipment makers have expanded order books five-fold in three years, doubled operating margins and reported a stress ratio of only 4% among nearly 150 large corporates in the segment. In investment-heavy industries, the agency says phased or modular capital expenditure is becoming a standard defence. It points to renewable energy, semiconductors, data centres, warehousing and healthcare, and notes that contract development and manufacturing organisations have kept operating margins above 30%. In chemicals and textiles, larger exporters have also protected themselves by staggering investments, shortening project cycles and building more diversified supply chains after shocks such as the Red Sea disruption.
That underlying resilience helps explain why FY26 still looked healthy on paper. India Ratings upgraded 361 issuers, or 19% of the portfolio it reviewed, and downgraded 115, leaving an upgrade-to-downgrade ratio of 3.1. Defaults edged up to 0.8% from 0.6%. Arvind Rao, the agency’s head of credit policy, said FY26 numbers did not yet show “incipient stress” from the West Asia conflict because the escalation came only in the closing month of the year, but warned that the five years of balance-sheet strengthening since FY21 would be tested in FY27. The divide inside the ratings universe is already visible: according to Fortune India, higher-rated borrowers recorded an upgrade-to-downgrade ratio of 4.4, against 2.3 for BBB and below. Infrastructure was the biggest source of upgrades, while commercial property, automobiles, consumer services and healthcare were helped by stronger demand.
The next stage of the story may be shaped as much by money markets as by operating performance. In a 1 September 2026 note, India Ratings said system liquidity was likely to moderate from Q3FY27 because of festival-season currency leakage, a wider current account deficit, softer government spending and subdued capital inflows. Soumyajit Niyogi of the agency said: “the real test for the credit market will be ensuring adequate access to growth capital for smaller businesses and financial institutions”. India Ratings added that if capital inflows remain weak, maturing foreign-exchange forward positions and structural liquidity leakages could revive the case for central bank bond purchases from Q4FY27. It also expects credit and term premia to remain elevated, which would make investors more selective and leave lower-rated or more leveraged borrowers facing longer and costlier fund-raising cycles.
That matters because the vulnerable end of the market was already under strain before the latest geopolitical flare-up. In an earlier review of 1,898 MSMEs and 1,055 mid-corporates, India Ratings warned that loans worth ₹21,800 crore sat in high-risk borrowers exposed to worsening operating conditions linked to the tariff war. Of that, ₹8,100 crore was owed by MSMEs, representing 16% of the debt in the sample, while ₹13,700 crore sat with high-risk mid-corporates. As of 31 March 2024, 23% of MSMEs in that study were stressed, compared with 11% of mid-corporates. Neermoy Shah of India Ratings said: “Capex intensity is usually low among MSMEs”, because so many were still grappling with working-capital needs and the cost of finance. The agency’s more recent sector commentary suggests the same fragility remains visible at the lower end of auto ancillaries, residential property and consumer durables.
Other rating agencies broadly agree on the direction of travel, even if their numbers differ. The Times of India reported that India Ratings and ICRA both posted upgrade-to-downgrade ratios of 3.1 in FY26, while CareEdge slipped to 1.93 and CRISIL to 1.50, signalling that improvements are becoming more selective across the market. Agencies still see support for infrastructure, renewable power, healthcare and defence from public capital spending and domestic demand, but they are increasingly wary of export-oriented businesses, MSMEs and energy-intensive sectors such as fertilisers, chemicals and textiles. For now, large corporates appear capable of absorbing shocks through earnings rather than damaged balance sheets. The unanswered question for the rest of FY27 is whether government support, easier financing conditions and a broader pick-up in consumption arrive quickly enough to stop smaller companies falling further behind.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
