SOVEREIGN CREDIT RATINGS : IN INDIA

The decision to go for Sovereign credit rating by the country like private sector or corporate sector firms evoked much discussion in India. Sovereign credit rating refers to an independent assessment of the credit worthiness of a country or Sovereign entity. Sovereign credit ratings can give the  investor insight about the level of risk associated with investing in debt of a particular ountry. Generally independent credit rating agencies make an assessment of credit risks of prospective debtor - whether an individual, a business company or Government depending on predicting their ability to pay back their debt and also an implicit forecast about the likelihood of the debtor defaulting.The evaluation method from a credit rating agency comprises of  both quantitative and  qualitative sources. The country risk ranking prepared by the credit rating agencies as on January  2018 based on evaluation of 185 countries mainly based on factors like political risk, economic risks etc showed that  ten least risky ranking countries secured exemplary ranking of AAA Sovereign credit ranking with  Singapore the  only Asian country with a score of 88.6 ranking first followed by Norway(87.66),Switzerland(87.64),Denmark(85.67), Sweden (85.59) , Luxembourg (83.85),Netherlands(83.76) Finland (83.1) ,Canada(82.98), and Australia(82.18).

The ability and willingness  to  bear sovereign debt by the country is deeply watched by foreign markets, domestic markets comprised of both investors and savers .Most significant credit rating agencies acclaimed globally are Standard and poor, Moodys and Fitch . They measure  the Sovereign credit ratings based on broadly five pillars namely 1.Economic strength- ( mainly GDP percapita,non voltatility of macro variables)2.Fiscal stability- fiscal deficit and public debt .3.Monetary - interest rate ,NPAs of banks etc 4.Institutional- regulatory framework and strength 5.external strength- current account deficit, capital movements, foreign exchange reserves  etc. Such rating express the probability that the rated party will go into default within a time horizon- generally one year or and anything  beyond one year is treated as long-term. Nowadays only short-term ratings are mainly used .Moreover country's debt default history and debt's bearing on tax money are equally important.

S&P,Moodys, Fitch and DBRS are the only four rating agencies recognized by the European Cental Bank for determining collateral requirements for banks to borrow from the Central Bank. The ECB uses the first best rule among the four credit rating agencies - S&P,Fitch and DBRS.Normally credit rating attributed by different agencies followed the scale or range for grading excellent to poor. Potential investors utilize credit rating as a measure of the riskiness of a particular country's bond.Standard & Poor and Fitch followed the rating pattern as the range between AAA,AA (high),AA,AA (low),A(high)A,A(low),BBB(high)BBB,BBB (low),BB(high),BB,BB(low), CCC,(high)CCC,CCC(low), CC(high),CC,CC(low),C ( high),C,C (low) and D.Under the European Union Credit Rating Agency Regulation (CRAR)  the European Banking Authority has developed detailed series of mapping tables to create "Credit Quality steps "(CQS) so as to make regulatory capital rules and short run and long run bench mark as default rates.

In substance  credit rating makes an assessment about the relative ability tof an entity to meet its financial commitments comprising  credit risks or relative credit worthiness of the borrower. Recently,Care Edge became the first Indian Credit rating agency to enter the global Sovereign rating  exercise, covering 39 countries India was assigned BBB+ rating based on parameters like resilient post pandemic recovery, investment in infrastructure and General Government debt to GDP ratio (projected to decline from current 80 % to 78% by 2030. Countries like Germany, Netherlands, Singapore and Sweden got highest AAA Sovereign credit rating. All West based internationally acclaimed   Sovereign credit rating agencies ranked  only lowest investment grade to India. For instance  Moodys assigned Baa3 lowest investment stable outlook,Standard and Poor BBB- lowest investment and stable outlook followed by Fitch  BBB- lowest investment grade for India. Since the global credit rating is dominated by three oligopolistic firms namely Moodys, S& P and Fitch their ratings tends to converge each other and entry and sustenance of new rating agencies with more realistic and transparent approach towards Emerging markets and developing economies and less developed countries are a very daunting task.

As Sovereign credit rating  (SCR) is an assessment of the country's capacity to meet debt obligations, It  facilitate borrowing from global capital market at low cost and  increases investor's confidence and attracts foreign investment. A favourable Sovereign credit rating is utmost important to get access to international bond market as well. It has been observed that the methodology followed by major credit rating agencies are neither transparent nor objective and they have got certain degree of bias against Emerging and Developing economies and undue weightage is given to qualitative variables in credit ratings like world governance indicators, rule of law etc.It remains as a fact that India has never defaulted her Sovereign debt. More over in most of the quantitative indicators we are performing well in terms of economic growth, infrastructre development monetary policy ( inflation, financial markets and NPAs) of  banks and external sector with low current account deficit and record foreign exchange reserves etc. Funding mix of external debt and debt is a major problem. India's debt profile is not good and debt to GDP ratio is currently around 84%.Most distressingly interest payments for debt account for one fourth of  our Revenue Account,whereas in many developing countries it is strikingly below 10%.In any case being the 5th largest global economy  with fastest growing GDP strong and resilient macr economic variables like low NPAs in the banking sector, stable inflation rate except for occasional volatility in food inflation,  infrastructure development and very strong external sector etc  should get appropriate ranking in Sovereign Credit rating measurement. Most of the credit rating agencies hailing from the west should stop opaqueness resorted to while assessing developed countries of the North, instead make it transparent universally with appropriate changes in the yardsticks used for credit rating of the Emerging Market and Developing Economies and also less developed countries.