Amidst demand for reforms in the sovereign ratings’ methodology being adopted by the Big-three, homegrown rating firm CareEdge has assigned long-term foreign currency rating of ‘BBB+’ to India, two notches higher than the former’s.
Analysts say this reflects true assessment of India’s economic potential.
The Big-3 credit rating agencies (CRAs)– S&P Global, Moody’s and Fitch –have assigned long-term foreign currency rating (or sovereign rating) of ‘BBB-’/ ‘Baa3’ to India, which is the lowest investment grade.
To be sure, S&P Global has maintained India’s sovereign rating unchanged since 2007. Similarly, Fitch has held its rating steady since 2007, and Moody’s since 2004.
“There is clearly a lot of qualitative judgement involved in the rating process of sovereigns and it is possible that countries with low per capita income such as India get shortchanged a little bit,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership. “In that light, it is possible that the new ratings agency is more flexible, assuming there is no home country bias,” he said.
In December, a finance ministry paper had said that the sovereign rating of India has “remained static” at ‘BBB-’ during the last 15 years, despite the country climbing the ladders from the 12th largest economy in the world in 2008 to the 5th largest in 2023. “This has serious implications for developing sovereigns’ access to capital markets and ability to borrow at affordable rates,” the paper authored by economists led by chief economic Adviser had said.
Earlier in an interaction with FE, Sanjeev Sanyal, member, Economic Advisory Council to the Prime Minister (EAC-PM) had said that India’s macroeconomic numbers are clearly way superior to those with comparable ratings. “There is little risk of any sovereign default, given that almost all our debt is rupee denominated, and yet we are at the bottom of the sovereign-rating investment grade…this makes no sense,” he had said.
In a press statement, CareEdge said that it is very important to “have transparency” in methodology of sovereign ratings, particularly in assessing the growth potential and investment needs of economies.
Mehul Pandya, managing director, CareEdge told FE that even though the methodology used for estimating India’s sovereign rating is “largely comparable” with that used by the Big 3, some significant differences do exist. “For instance, we have per capita income on purchasing power parity (PPP) terms for our calculations, but they use the nominal one,” Pandya said. According to the International Monetary Fund (IMF), in April 2024, India’s per capita income stood at $2,730 in nominal terms, and $10,120 in PPP terms.
CareEdge’s methodology assesses a sovereign’s creditworthiness using five key pillars: Economic Structure & Resilience (25% weight), Fiscal Strength (25%), External Position & Linkages (16.67%), Monetary & Financial Stability (16.67%), and Institutions & Quality of Governance (16.67%).
While these pillars are generally similar to those used by the Big-3 rating agencies, the weights differ. For example, S&P Global evaluates sovereign creditworthiness across four pillars: Structural Features (53.5% weight), Macroeconomic Performance, Policies & Prospects (10.1%), Public Finances (18.5%), and External Finances (17.9%).
“We thought this approach (of Big 3) had to change, so we came up with a different methodology after holding many consultations with different stakeholders, such as the government, companies, banks, multilateral organisations etc.,” Pandya said.
Economists also say that India’s debt-to-GDP ratio is a crucial factor for assessment of its sovereign rating, and unless it falls considerably from the current levels, an upgrade may not happen. In 2023-24, the general government debt-to-GDP ratio was 81.6%, which is projected to decline to 73.4% in 2030-31, according to the Reserve Bank of India (RBI).
On the impact on investor sentiment, Pandya said that at the current juncture whether the rating would make any substantial impact can’t be said. “In fact, even today, the yields on corporate bonds issued overseas don’t correlate with the rating of BBB-, rather depict much finer details of the economic fundamentals.” For instance, in April 2023, state-owned non-banking financial company REC issued $750 million worth dollar-denominated Green Bonds, which was priced at a minimum new issue premium of 7.5 basis points, tighter than the most recent high-rated issuances.
Indranil Pan, chief economist at YES Bank, however, said: “One rating going higher doesn’t mean much, unless others follow. Until others improve their rating, I don’t see any immediate or near-term impact.”
The finance ministry paper had said that while CRAs expect sovereigns to make improvements in the quality of their governance, reduce market risks, and improve the regulatory environment, the agencies themselves offer no insights or guidance on exactly what factors are part of their considerations and suggestions. “This opaqueness makes it difficult for any country to fully understand what reforms are needed to earn a credit rating upgrade.”