Global Credit Rating Agencies

Why in news?

Recently Fitch, a global rating agency accorded “BBB” ratings to India’s sovereign rating.

A credit rating agency is an agency that assess the creditworthiness of organisation, individual or entity and assign ratings to it.
In India, CRAs are regulated by SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992.
The global credit rating industry is highly concentrated, with 3 agencies - Moody's, Standard & Poor's, and Fitch.

A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity.
By allowing external credit rating agencies to review its economy, a country shows that it is willing to make its financial information public to investors.
The factors that determine the sovereign credit rating of a country include:
- Per capita income
- GDP growth
- Rate of inflation
- External debt
- Economic development
- History of defaults
A country with high credit ratings can access funds easily from the international bond market and also secure foreign direct investment.

India’s Rating - All three global rating agencies accorded lowest investment grade rating in India.
Rating agency Fitch affirmed India's sovereign rating at ''BBB-'' with a stable outlook on robust growth and resilient external finances.
BBB ratings – It indicates that expectations of default risk are currently low.
The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.
Reasons for low rating - India is expected to face headwinds from elevated inflation, high-interest rates and subdued global demand.
Other concerns include low labour force participation rates and an uneven reform implementation.
The fiscal consolidation path, under which the fiscal deficit is to be brought down to 4.5 % of GDP by 2025-26, remains challenging.
Public finance remains weak while structural indicators are lagging.

Low forex risk - Since all debt is exclusively in rupees and even participation of FPIs is in rupee bonds the forex risk is very low.
So forex situation in India remains strong.
Financial growth - The projected financial growth is 7% for the year 2023 which is quite impressive compared with rest of the countries.
India’s response during COVID - The approach was more through the reform and policy route than fiscal deficits in the form of payouts, which was followed by developed countries.
Banking system – It has as rebounded well to pandemic period levels indicating it can provide funds that enable the economy to move on to a higher growth path.
RBI - Ensured a smoother path to normalcy compared with central banks of other nations in after math of the COVID (RBI moved the interest rates without any significant impact on growth)
Rupee-Dollar - Even though the dollar appreciated, the rupee always remained at the median level of depreciation compared with dollar and other currencies.
Quality of government spending - Budget has increased the share of capital expenditure from around 12-13 % pre-pandemic to 22 % for FY24.
Rupee trade agreement with Russia - The strategy to go-domestic is a unique model even though may be slow and time taking.
Digitization - The digitization drive has brought about structural changes in the economy making systems more efficient.

The rating methodologies need to adapt with the changing times.
Global credit rating agencies have to do away with the fixed mindset policy where it is believed that emerging markets can never really move up the scale.

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