Economic study urges rating agencies to be more transparent and less subjective in sovereign rating

As ratings do not reflect India’s fundamentals, the survey indicated that past changes in India’s sovereign ratings have not had a major negative impact on certain indicators such as Sensex yield, rate exchange rates and the yield of government securities.

India’s sovereign credit ratings do not reflect the fundamentals of the economy, the Economic Survey said on Friday and pushed global agencies to become more transparent and less subjective in their ratings.

Economic Survey 2020-21, tabled in Parliament, said that the methodology of sovereign credit ratings should be changed to reflect the ability and willingness of economies to pay their debt obligations, and suggested that developing economies should unite to remedy this bias and subjectivity inherent in sovereign bonds. credit rating methodology.

“Never in the history of sovereign credit ratings has the world’s fifth-largest economy been ranked in the lowest rung of the investment grade (BBB- / Baa3). While sovereign credit ratings do not reflect the fundamentals of the Indian economy, and skewed credit ratings are hurting REIT flows, ”the survey said.

It is therefore imperative that countries engage with credit rating agencies to argue that their methodology needs to be corrected to reflect the ability and willingness of economies to pay their external obligations.

Updates to Economic Survey 2021

Quoting Bengali poet Rabindranath Thakur “Where the spirit is fearless and the head held high … In this paradise of freedom, my Father, may my country wake up”, the survey stated that it is imperative that the methodology of Sovereign credit ratings be made more transparent, less subjective and better suited to reflect the fundamentals of economies.

As ratings do not reflect India’s fundamentals, the survey indicates that past changes in India’s sovereign ratings have not had a major negative impact on some indicators such as Sensex Yield, Rate of exchange rate and the yield of government securities.

“Past episodes of rating shifts have no or little correlation with macroeconomic indicators … India’s fiscal policy, therefore, should not remain subject to a boisterous / biased measure of fundamentals. India and should instead reflect Gurudev Rabindranath Thakur’s feeling of a fearless spirit, “said the survey written by Chief Economic Advisor Krishnamurthy Subramanian.

Stating that there is a bias against emerging giants in sovereign credit ratings, the survey indicates that India has been an outlier in terms of GDP growth rate, inflation, general government debt, political stability, rule of law, corruption control, investor protection, ease of doing business, short-term external debt (as a percentage of reserves), reserve adequacy ratio and history of sovereign defaults over the past decade.

“Within its cohort of sovereign ratings – countries rated between A + / A1 and BBB- / Baa3 for S & P / Moody’s – India is clearly outlier on several parameters, that is to say a sovereign whose rating is clearly lower than that required by the effect on the sovereign rating. of the setting, ”he said.

Global rating agencies have India’s lowest investment rating, which is just above junk status.

In June, Fitch Ratings revised India’s outlook from “negative” to “stable” and confirmed the rating to “BBB-“, saying the coronavirus pandemic has significantly weakened the country’s growth prospects for the year and outlined the challenges associated with a high audience-debt burden.

Moody’s Investors Service downgraded India’s sovereign rating from “Baa3” to “Baa3”, saying there will be challenges in implementing policies to mitigate the risks of a prolonged period of low growth and deterioration of the budgetary situation.

S&P Global Ratings retained the “BBB-” rating for India for the 13th consecutive year in June of last year.

The survey said that credit scores map the probability of default and therefore reflect the borrower’s willingness and ability to meet his obligations. India’s willingness to pay is unmistakably demonstrated by its history of zero sovereign defaults.

He said India’s ability to pay can be assessed not only by the extremely low foreign currency denominated sovereign debt, but also by the comfortable size of its foreign exchange reserves which can pay off short-term private sector debt. as well as all external debt, including that of the private sector.

“The methodology of sovereign credit ratings must be changed to reflect the ability and willingness of economies to pay their debt obligations by becoming more transparent and less subjective. Developing economies must unite to fight against this bias and this subjectivity inherent in the methodology of sovereign credit rating in order to avoid the exacerbation of crises in the future “, adds the poll.

In addition, the pro-cyclical nature of credit ratings and its potential negative impact on economies, especially lower-rated developing economies, must be addressed quickly.

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