The renowned credit rating agency, S&P Global Ratings, has projected stability in India’s sovereign rating for the next two years. This prediction holds despite the unfavorable economic effects of the ongoing pandemic. The current rating stands at BBB-, a level that S&P has deemed appropriate to remain constant.
S&P is one of the world’s most significant credit rating organizations, providing risk assessment on a scale ranging from AAA to D. It bestows letter grades to both corporations and countries, including the debt they issue, thus reflecting their respective investment risks.
Understanding Sovereign Credit Ratings
A sovereign credit rating refers to an independent evaluation of a country or sovereign entity’s creditworthiness. Such ratings serve as indicators of the associated risk level when investing in a particular nation’s debt, encompassing any political risk.
Countries often seek out these ratings to attract foreign direct investment (FDI), besides issuing bonds in external debt markets. Upon a country’s request, a credit rating agency assesses its economic and political environment before assigning a rating.
Sovereigns with a BBB- or higher rating from S&P are considered investment grade. Those receiving BB+ or lower grades are deemed speculative or “junk” grade. Moody’s view is similar; while it considers a Baa3 or higher rating as investment grade, a rating below Ba1 is considered speculative.
Sovereign Credit Ratings in the Indian Context
In the Economic Survey 2020-21, a demand was made to render the sovereign credit ratings methodology more transparent, less subjective, and better tuned to reflect economic fundamentals.
India, within its sovereign credit ratings cohort (rated between A+/A1 and BBB-/Baa3), emerges as an outlier on several parameters. It gets a significantly lower rating than what the impact on the sovereign rating of the parameter warrants. These parameters cover areas like GDP growth rate, inflation, government debt (as % of GDP), current account balance (as % of GDP), political stability, investor protection, ease of doing business, and more.
India’s ability to repay its debts is also evidenced by its zero sovereign default history and its large foreign exchange reserves that can cover short-term external debts for both private and public sectors.
Understanding Credit Ratings
A credit rating represents a quantified measurement of a borrower’s creditworthiness concerning a specific debt or financial obligation. This type of assessment is applicable to any entity seeking to borrow funds, including individuals, corporations, state or provincial authorities, and sovereign governments.
Rating agencies gauge companies’ and governments’ financial strength, especially their ability to meet principal and interest payments on their debts. The big three international credit rating agencies are Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s (S&P), which control approximately 95% of the global ratings business.
In India, six credit rating agencies, CRISIL, ICRA, CARE, SMERA, Fitch India, and Brickwork Ratings, are registered under the Securities and Exchange Board of India (SEBI).