India’s sovereign credit rating across all major rating agencies, including S&P Global, Fitch, and Moody’s, stands at the lowest investment grade. This is surprising considering that India is one of the fastest-growing economies in the world and is on track to become the third-largest economy globally. So why is India’s credit rating so low, and is there a credible case for an upgrade?
Understanding Credit Ratings
A credit rating is a measure of a country’s ability to honor its debt commitments. A country with a high credit rating, such as AAA, indicates a low risk of default. As the ability to service debt decreases, the rating moves downwards, eventually reaching the lowest level of investment grade, which is BBB.
In an interview with TOI, Mrs. Sabnavis, the Chief Economist at Bank of Baroda, explains the importance of a good credit rating and the parameters that rating agencies consider when assigning ratings.
The Case for an Upgrade
Mrs. Sabnavis believes that India’s credit rating should be upgraded due to several factors:
- India’s ability to honor its debt commitments: Despite its current rating, India has been able to meet its debt obligations. This indicates that the risk of default is low.
- Attractiveness to foreign investors: India is an attractive destination for foreign investors, and this should be taken into account when assessing its creditworthiness.
- Debt denominated in rupees: Unlike some other countries, India’s debt is denominated in its own currency, which reduces the risk of currency fluctuations impacting its ability to service debt.
India’s current credit ratings are BBB★for S&P and Fitch, and Baa3 for Moody’s. Ratings below this level are considered speculative, and the risk of default increases. Mrs. Sabnavis believes that India deserves an upgrade to at least a level of A, indicating a lower risk of default and a higher creditworthiness.
She also highlights the progress India has made in terms of fiscal deficit management, robust reforms, and handling the global pandemic, which further support the case for an upgrade.
In Conclusion
India’s sovereign credit rating may be low, but there is a strong case for an upgrade. The country’s ability to honor its debt commitments, attractiveness to foreign investors, and the stability of its currency all contribute to a lower risk of default. With ongoing reforms and effective management of the pandemic, India’s creditworthiness should be recognized and upgraded to a level that reflects its true potential.
Sources:
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