Facts for Prelims (FFP)
Source: IE
Context: India’s Chief Economic Advisor (CEA) in its recent paper has raised concerns about the sovereign credit rating system.
| Topic | Details |
| What is Credit Rating? | Credit rating is an assessment of the creditworthiness of a borrower, including individuals, companies, or countries. |
| What is Sovereign Credit Rating? | A sovereign credit rating is an independent assessment of a country’s creditworthiness. It evaluates the country’s ability to repay debt without default, impacting the risk associated with investing in its debt instruments. |
| Key agencies include Standard & Poor’s, Moody’s, and Fitch Ratings, considering economic indicators, fiscal policies, political stability, and trade position. | |
| Importance of Credit Rating | Obtaining a good credit rating is crucial for accessing funding in the international bond market and attracting foreign investments. It also influences borrowing costs in global financial markets, allowing countries with higher ratings to borrow at lower interest rates. |
| Key Concerns Raised by CEA | Concerns include the disadvantageous rating methods for developing countries, lack of transparency in expert selection, unclear weights assigned to parameters, and subjective assessments favouring advanced economies. |
| Between 2006 and 2022, India’s GDP has risen, and foreign exchange reserves have increased, yet its credit rating remains lower than expected. | |
| CRAs heavily rely on the World Bank’s governance indicators, explaining only 68% of India’s rating. | |
| How CRAs Rated India | S&P Global and Fitch raised India’s rating to BBB (lowest investment grade), while Moody’s initially upgraded but later reverted to Baa3. |
| Way Ahead for India | India needs fiscal consolidation by reducing the government debt-to-GDP ratio and improving data quality. The absence of post-2011-12 survey results emphasizes the importance of accurate and transparent data. |
| Credit Rating in India | SEBI in India regulates credit rating agencies, including CRISIL, CARE, ICRA, Acuité Ratings, Brickwork Rating, India Rating and Research Pvt. Ltd, and Infomerics Valuation and Rating Pvt. Ltd. |
