India is requesting an upgrade to its sovereign credit rating

India wants to raise its sovereign credit rating, which is currently at the lowest possible investment grade because it believes its economic metrics have improved significantly since the pandemic.

So, what exactly are sovereign credit ratings?

  • A sovereign credit rating assesses a country’s creditworthiness, or ability to meet financial obligations.
  • It is a rating of a country’s credit risk associated with its bonds or other debt securities.
  • Credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings assign the rating.

India’s current ratings

  • S&P and Fitch rate India ‘BBB-‘ and Moody’s ‘Baa3’, all indicative of the lowest-possible investment grade, but with a stable outlook.

What does BBB stand for?

  • A ‘BBB’ rating indicates that default risk expectations are currently low.
  • The ability to meet financial obligations is deemed adequate, but adverse business or economic conditions are more likely to impair this ability.

What exactly is a rating agency?

  • Rating agencies evaluate an equity, debt, or country’s creditworthiness or potential.
  • Investors read their reports to make an informed decision about whether or not to invest in a specific country or companies in that geography.
  • They determine whether a country, equity, or debt is financially stable and whether it is at risk of default.
  • In layman’s terms, these reports assist investors in determining whether or not they will receive a return on their investment.

What exactly do they do?

  • After new developments, geopolitical events, or a significant economic announcement by the concerned entity, the agencies re-evaluate previously assigned ratings on a regular basis.
  • Their reports are sold and distributed through financial and daily newspapers.

What grading scheme do they use?

  • The three major rating agencies, Standard & Poor’s, Moody’s, and Fitch, follow largely similar grading patterns.
  • Standard & Poor’s assigns the highest grade, AAA, to countries, equity or debt, that have an extremely high capacity to meet their financial commitments.
  • Its grading slab consists of letters A, B, and C, with a single or double letter denoting a higher grade.
  • Moody’s divides ratings into two categories: short-term and long-term. Its long-term grading scale is Aaa to C, with Aaa being the highest.
  • Fitch also assigns ratings ranging from AAA to D, with D being the lowest. It follows the same hierarchy as Moody’s and Fitch.

The importance of such ratings

  • Access to Capital: A country’s credit rating indicates its ability to access capital at a lower cost, whereas a lower rating indicates that borrowing costs will be higher.
  • Credit ratings are used by investors to evaluate a country’s creditworthiness and to assess the level of risk associated with investing in that country.
  • Economic Growth: Higher credit ratings typically result in increased foreign investment, which can lead to job creation, increased productivity, and economic growth.
  • International Trade: Higher credit-rating countries are perceived as more stable and trustworthy, making them more appealing trading partners for other countries.
  • Reputation: Countries with lower credit ratings may be perceived as less trustworthy or stable, which can harm diplomatic relations and political influence.

Rating agencies are being chastised

  • Credibility: To lend credibility to their inferences, popular rating agencies publicly reveal their methodology, which is based on macroeconomic data made publicly available by a country.
  • Bias: These agencies were heavily criticised for allegedly causing the United States’ financial crisis, which began in 2017.
  • Metrics were tainted because the agencies underestimated the credit risk associated with structured credit products and did not respond quickly enough to deteriorating market conditions.
  • They were charged on multiple counts of methodological errors and conflict of interest.

Why is India attempting to improve its credit rating?

  • Improved creditworthiness: These ratings are used to assess a country’s creditworthiness, which can have an impact on borrowing costs.
  • Stable parameters: India has a number of stable parameters, including economic growth rate, inflation, general government debt, and short-term external debt as a percentage of GDP, among others.

Actions taken to improve ratings

  • India aims to reduce its fiscal deficit to 5.9% of GDP in the next fiscal year, down from 6.4% in the current fiscal year that ends March 31, and to 4.5% in the next three years.
  • According to India’s Economic Survey, the country will grow at a rate of 6% to 6.8% between 2023 and 2024, making it one of the world’s fastest-growing major economies.
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