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.
![](https://bsmedia.business-standard.com/_media/bs/img/article/2021-11/09/full/1636477476-4324.jpg)
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.
Source: https://economictimes.indiatimes.com/news/economy/indicators/india-bats-for-sovereign-rating-upgrade-in-review-with-global-agencies/articleshow/98608451.cms#:~:text=Agencies-,India%20is%20seeking%20an%20upgrade%20to%20its%20sovereign%20credit%20rating,government%20official%20said%20on%20Monday.