When will global credit rating agencies get their assessments of India right?

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Subscribe to enjoy similar stories. India’s 2020-21 Economic Survey had observed, “Never in the history of sovereign credit ratings has the fifth largest economy in the world been rated as the lowest rung of the investment grade (BBB-/Baa3). Reflecting the economic size and thereby the ability to repay debt, the fifth largest economy has been predominantly rated AAA.

China and India are the only exceptions to this rule—China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3." The Economic Survey further stated that changes in India’s sovereign ratings had a weak or no correlation with macroeconomic indicators and did not adversely impact yields on government securities, exchange rates and Sensex returns. However, sovereign ratings can be pro-cyclical and could adversely affect foreign portfolio investment (FPI), both debt and equity, in developing countries. Pro-cyclical, in this context, implies that credit rating agencies (CRAs) upgrade sovereign ratings during upswings and downgrade them during downturns.

The latter practice exacerbates macroeconomic stresses. Sovereign ratings don’t just affect FPI. The international credit ratings of public sector undertakings (PSUs) and public sector banks (PSBs) are linked to India’s sovereign ratings.

The international credit ratings of PSUs and PSBs, among other factors, drive their foreign currency borrowing costs. India’s sovereign ratings are constrained by its per capita income and fiscal deficit-induced indebtedness. How these metrics restrict sovereign ratings may be best understood by comparing India’s ratings and macroeconomic profile with the same of two developing Asian countries whose ratings were more or less at par with India’s a decade ago and have been