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Reforms in Sovereign Credit Rating Process
News: Recently, India’s Chief Economic Adviser, V Anantha Nageswaran, emphasized on the need for reform in the sovereign credit rating process.
What are Sovereign Credit Ratings?
• A Sovereign Credit Rating is an independent assessment of the creditworthiness of a country or sovereign entity. These ratings can provide investors with insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
Significance of Credit ratings
• They are usually essential for developing countries that want access to funding in international bond markets.
• Investors use these ratings as a way to assess the riskiness of a country’s bonds.
• Standard & Poor’s gives a BBB- or higher rating to countries it considers investment grade, and grades of BB+ or lower are deemed to be speculative or “junk” grade.
• Moody’s considers a Baa3 or higher rating to be of investment grade, and a rating of Ba1 and below is speculative.
Challenges in Current methodology and India’s engagement
• The CEA points out the opaqueness in rating methodologies and the difficulty in quantifying the impact of qualitative factors.
• The significant presence of qualitative factors leads to cognitive biases and concerns about the credibility of ratings.
• In India, Finance ministry officials have met with representatives from Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings. While S&P and Fitch rate India at BBB, Moody’s rates it at Baa3 with a stable outlook.
What are CEA’s recommendations?
• Sovereigns are expected to be transparent; similarly, rating agencies should make their processes clear and avoid untenable judgments.
• Enhanced transparency could lead to more reliance on hard data and possible credit rating upgrades for many sovereigns.
• Improved ratings can help developing countries access private capital crucial for addressing global challenges like climate change.
• With initiatives like production-linked incentives and Make in India, India aims for a $2 trillion export target by 2030.
• Reforms in credit rating process, parameters taken into consideration and transparency is likely to help Developing countries get better access to credit with reduced funding costs. It will also contribute to more accurate and fair global financial system.