Credit Rating Agencies and India’s Sovereign Rating

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    • Credit ratings agency ‘Moody’s’ has changed India’s sovereign rating outlook from ‘negative’ to ‘stable’.
      • It also affirmed the country’s foreign-currency and local-currency long-term issuer ratings at Baa3.
      • In 2020, Moody’s downgraded India’s sovereign rating from ‘Baa2’ to ‘Baa3’, the lowest investment grade.
        • It stated the following reason behind last year’s move.
          • Challenges in implementation of policies to mitigate risks of a sustained period of low growth
          • Deteriorating fiscal position. 
        • The outlook on the last year rating was kept negative.

    Reasons behind upgrade in the rating agency’s outlook

    • High Capital Cushion and Greater Liquidity:
      • Bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years.
      • In addition, banks have strengthened their capital positions, pointing to a stronger outlook for credit growth to support the economy.
      • Both will strengthen banks and non-bank financial institutions which now pose much lesser risk to the sovereign than previously anticipated.
    • Positive Economic Environment:
      • Risks stemming from a high debt burden and weak debt affordability remain.
      • Still the economic environment will allow for a gradual reduction of the general government fiscal deficit over the next few years.
        • Hence it is expected that the sovereign credit profile will not  further deteriorate.

    Steps taken by India to strengthen the Banking System

    • Recovery of Bad Loans:
      • In the last 6 financial years, banks have recovered Rs. 5.01 lakh crore of bad loans, enabling them to improve their financial metrics.
    • Capital Infusion in Banks by Government:
      • The government has infused Rs 3.06 lakh crore in state-owned banks in five years between 2017-18 and 2021-22.
    • Creation of National Asset Reconstruction Company Ltd (NARCL):
      • Government has also taken a series of reforms to strengthen banks, improve debt resolution and recovery.
      • Recently, the government approved extending a guarantee of Rs 30,600 crore to the National Asset Reconstruction Company Ltd (NARCL).
        • It will help to clear the banking sector’s stressed assets of around Rs 2 lakh crore in a time-bound manner.

    Moody’s assessment on growth

    • V Shaped recovery of Indian Economy:
      • Following a deep contraction of India’s real GDP is expected to surpass 2019 levels this fiscal year.
        • It was 7.3 percent in the fiscal year ending March 2021, and is expected to rebound to a growth rate of 9.3 percent this year. 
        • It will be followed by 7.9 percent in fiscal 2022.
    • High Real GDP Growth Rate at around 6 per cent:
      • Looking ahead, Moody’s expects real GDP growth to average around 6 per cent over the medium term.
    • Underestimation of Data by Moody’s as per Experts:
      • Some analysts argued that Moody’s has underestimated India’s potential of real GDP expansion in the medium term.

    What is the impact of the upgrade?

    • Lower Borrowing Costs:
      • Since overseas borrowing costs are tied to 
        • a country’s rating and 
        • the agencies’ outlook on the nation, 
      • An upgrade usually helps in lowering borrowing costs for the government as well as the corporate sector. 
    • Increase foreign investors:
      • Foreign investors take comfort in subscribing to government and corporate bonds at lower rates because
        • Chances of default recedes.
        • Overall debt service ability increases with better ranking.

    Credit Rating Agencies

    • It is a company that assigns credit ratings
      • which rate a debtor’s ability to 
        • pay back debt by making timely principal and interest payments and 
        • the likelihood of default.
    • There are 3 big credit rating agencies of world
      • Standard & Poor’s (S&P)
      • Moody’s
      • Fitch
    • India’s Rating at present
      • Of the three big rating agencies, Standard & Poor’s and now Moody’s, have a stable sovereign rating outlook.
      • Fitch has kept it negative until now. Like Moody’s, the other two have also kept India at the lowest investment grade.

     

    Courtesy: ResearchGate

    India’s stand on such ratings

    • India has been rated so low despite being the 5th largest economy.
    • Economic Survey 2021 categorically highlighted such bias against India and China through a graph.

    Courtesy: IndianBudget

    Source: IE