Are Sovereign Credit Ratings Biased? Here's Why India Is Asking For A Credit Rating Upgrade

The lowest investment grade rating on India is issued by all three global credit rating agencies Fitch, S&P and Moody’s. The ratings are used by investors to gauge the country’s creditworthiness and influence borrowing costs.

India is one of the fastest-growing major economies in the world and it is reflecting a potential growth while most of the other nations are struggling to deal with economy slowdown.

The global rating agencies, Fitch, Moody’s and S&P have the lowest investment grade rating on India, with a stable outlook. The ratings are important because ratings are looked by investors as a barometer of a country’s credit worthiness and impacts borrowing cost.   

Moody’s rating downgraded India to ‘Baa3’ from ‘Baa2’ in the month of June 2020 with negative outlook, citing a lack of reform momentum and sluggish economic growth. Moody’s later revised the India outlook to a stable in October 2021. 

What is credit rating? 

Credit rating agency is a company that provides an assessment of the implied credit risk for companies, stocks, government, mortgage-backed securities, bonds and collateralised debt obligations. CRAs assign probabilities to these events and rate companies on a scale, usually using letters, from AAA to D, where AAA is the highest rating and D is the lowest.

Usually, the credit rating agencies stick to their rating but if there is a change in sentiment which will affect the optimism on the financial side, the agencies will tweak their outlook. For example, a credit rating agency could say a company is stable today and change its outlook to negative tomorrow. In other words, they could keep the rating same but change the outlook to reflect any change in sentiment.

The barometric of the rating are as follows:

Moody's assigns a rating to securities based on their quality, with the highest rating being Aaa and the lowest rating being C. While, B is for Medium-grade, subject to moderate credit risk and may possess certain speculative characteristics.

For S&P, the scale ranges from AAA to D, with “mid-level” ratings of “BBB” or “BBB-” offered at each level from AA to CCC (e.g., BBB+ BBB, BBB-). Additionally, S&P may provide ratings guidance (known as credit watch) on the likelihood of an upgrade (positive), a downgrade (negative) or an uncertain (neutral) rating. 

Fitch's issuer and issue rating scale is constructed using the categories of investment grade (AAA) to investment grade (BBB) and speculative grade (D), with an additional margin of difference between AA and CCC levels representing the relative differences in the likelihood of default or repayment for issuers. 

Why Is India Questioning The Credit Ratings? 

India is rated at the lowest by all the three credit rating agencies. Moody's rating for India is ‘Baa3’ with a stable outlook, this is the lowest rating of investment grade and states that India is at moderate credit risk. Fitch rating for India is 'BBB-' with a stable outlook, this puts India into a good credit rating with low default risk. S&P Global Ratings rated India as ‘BBB-‘with a stable outlook, same as Fitch report, which is considered as speculative investment grade.

India called the credit rating as unfair and the Economic Survey charged the global credit rating agencies with prejudice against emerging economies such as of India. It added that, "There is a large academic literature that highlights bias and subjectivity in sovereign credit ratings, especially against countries with lower ratings." India complaints that the rating agencies are very critical of developing countries such as India while giving a pass to countries like the US, which has been very irresponsible with its money.  

Countries like Indonesia have been rated higher than India, making the Indian government skeptical of the methods used by the global rating agencies while assessment.  

Every country, including India, relies heavily on foreign investors to put money into building businesses and stock markets. This helps to secure the future of the country in tougher times. If the ratings go up, India could see a huge influx of money, and that could really change things. 

This is the reason why on Friday, India presented a compelling case for an upgrade of the country’s sovereign rating with global rating agencies citing a sharp post-pandemic improvement in the country’s economic fundamentals despite global turmoil and also challenged the criteria used by the agencies 

Stance Of The Credit Rating Agencies 

Credit rating agencies have their own reason for putting India into the lowest rating grade. The argument talks about India’s fiscal deficit. India has a huge fiscal deficit in FY23, amounting to almost 6.4 per cent of GDP. By comparison, the average deficit for other countries with a BBB rating is around 3.6 per cent. 

Also, India has a considerable amount of borrowings, for which, India has to use 27 per cent of its revenue. The median ratio of debt is just 7 per cent median for other BBB rated peers. 

India has consistently failed to maintain fiscal deficit discipline as outlined in the Fiscal Responsibility and Budget Management Act of 2003. 

To reduce the fiscal deficit, Government of India has to put a controlled lock on its spending which it cannot afford to do as the private sector is yet not in a shape to drive the economy alone on their shoulders.  

The relevance of credit agencies in the post covid era is questionable, but the bitter truth for India is that the world still counts on these agencies. And India is trying to do everything possible to turn around the tables so that it gets cheaper loans and gets some good all round investment.  

In the coming days, the picture will be clearer. Till then, India has to wait and watch. 

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