Status of India’s Sovereign Credit Rating

Indian Economic System Financial System

09-May-21

Context: Recently, the S&P Global Ratings has said that India's credit rating would be retained at the current level for the next two years.

S&P is one of the largest credit rating agencies, assigning letter grades to companies and countries and the debt they issue on a scale of AAA to D, indicating their degree of investment risk.

Key Highlights

India will see a slightly faster pace of growth in the next couple of years that will support its sovereign rating.
S&P, which had in March seen the Indian economy growing by 11 per cent in the fiscal year to March 2022, saw GDP growth rate dropping to 9.8 per cent under the 'moderate' scenario.
It highlights that there could be upside pressure on general government fiscal deficit forecast of 11 per cent as revenue generation would be weaker.
India's rating remains stable on a 'BBB-' rating and the S&P do not expect there to be a change in the rating level over the next 2 years.
S&P had last year retained India's rating at the lowest investment grade 'BBB-', with a stable outlook for the 13th year in a row.
In the 'moderate' and 'severe' scenarios, S&P projected the Indian economy to grow 7.8 per cent and 9.6 per cent, respectively, in the next fiscal (2022-23).

About Sovereign Credit Rating

It is an assessment of a country’s credit worthiness.
It shows the level of risk associated with lending to a particular country since it is applied to all bonds issued by the government.
The credit rating agencies consider various factors such as the political environment, economic status, and its creditworthiness to assign an appropriate credit rating.
The three influential rating agencies include Moody’s Services, Fitch Ratings, and Standard & Poor’s.

Significance of Sovereign Credit Rating

They are important for countries that want to access funds in the international bond market.
A credit rating agency will evaluate a country’s economic and political environment at the request of the government and assign a rating stretching from AAA grade to grade D.
A country with high credit ratings can access funds easily from the international bond market and also secure foreign direct investment.
A low sovereign credit rating means that a country faces a high risk of default and may have experienced difficulties in paying back debts.

Determinants of Sovereign Credit Ratings

Per capita income: It estimates the income earned per person in a specific area.

It is calculated by taking the total income earned by individuals in a given area divided by the number of people residing in that area.
A high per capita income increases the potential tax base of the government, which subsequently increases the government’s ability to repay its debts.

GDP growth: It refers to the percentage growth in the GDP of a country from one quarter to another as the economy navigates a business cycle.

Strong GDP growth means that a country will be able to meet its debt obligations since the growth in GDP results in higher tax revenues for the government.

Rate of inflation: Sovereign debts are susceptible to changes in the rate of inflation, and an increase in inflation will affect a country’s ability to finance its debt.

A high inflation rate points to structural problems in a country’s finances, and it is likely to cause political instability as the public becomes dissatisfied with the increasing inflation.

External debt: Some countries rely heavily on external debts to finance their development and infrastructure projects.

Increasing debt levels translate to a higher risk of default, which may affect its ability to access funding from international lenders.

Economic development: The credit rating agencies consider the level of development when determining the sovereign credit rating of a country.

History of defaults: A country that defaulted on its debt obligations in the past is considered to have a high sovereign credit risk by rating agencies.