The prominent international ratings agency, Moody’s, has recently adjusted India’s sovereign rating outlook from “Negative” to a more optimistic “Stable”. Furthermore, Moody’s confirmed India’s rating at “Baa3”, which is the lowest investment grade, just above junk status. This shift promises to influence India’s fiscal policies, investor insights, and foreign direct investment potential.
Sovereign Credit Rating: An Overview
Sovereign Credit Rating (SCR) is an independent evaluation of a country’s creditworthiness. This assessment provides valuable insight for investors regarding the risk levels associated with investing in a specific country’s debt, including any existing political risk. Countries often seek to acquire a sovereign credit rating for purposes beyond issuing bonds in external debt markets; a major motivation is to attract Foreign Direct Investment (FDI). Upon the country’s request, a credit rating agency examines its economic and political environment to assign a suitable rating.
Moody’s regards a Baa3 or higher rating as of investment grade, whereas a Ba1 rating and below is considered speculative. S&P, on the other hand, designates a BBB- or higher rating to countries deemed investment grade, and BB+ ratings or lower are labelled as speculative or junk grade.
India and Sovereign Credit Ratings
Despite India’s consistent performance across various parameters between 2000 and 2020, it has frequently been rated below expectation. India remained a notable outlier on several aspects, including GDP growth rate, inflation, general government debt, political stability, rule of law, control of corruption, ease of doing business, and sovereign default history.
Interestingly, India’s repayment capacity can be inferred not only from the extremely low foreign currency-denominated debt of the sovereign but also from its sizable foreign exchange reserves. These reserves can liquidate short-term private sector debts and the entirety of India’s sovereign and non-sovereign external debt.
Economic Survey’s Take on SCRs
The Economic Survey suggests that India’s fiscal policy should prioritise growth and development, rather than being curbed by biased and subjective sovereign credit ratings. It advocates for developing economies to unite in addressing the bias and subjectivity immanent in the sovereign credit ratings methodology, to avoid exacerbating future crises.
Credit Rating: A Closer Look
Credit rating is a quantified estimation of the creditworthiness of any borrower—be it an individual, corporation, state or provincial authority, or sovereign government. This rating is assigned by rating agencies that assess the financial strength of various entities, particularly their ability to satisfy principal and interest payments on their debts.
Internationally, Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) dominate the field, controlling approximately 95% of global ratings business. In India, there are six credit rating agencies registered under the Securities and Exchange Board of India (SEBI)—CRISIL, ICRA, CARE, SMERA, Fitch India, and Brickwork Ratings.