Credit rating of India - is it fair or not?

 

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3. Moody's Investors Service
4. Standard & Poor's (S&P)
5. Fitch Ratings
6. DBRS Morningstar
7. Kroll Bond Rating Agency

What are they?

We have all heard about government bonds right? How safe are they to invest. Well, it is a known and head fact that US government bonds are the safest to invest in. This leads to them having a high credit rating issued by credit rating companies above. The top 5 are those that are listed above.

So why are these companies so significant. The rating these companies give to the bonds directly impacts investor confidence regarding the bond. Lower the confidence higher the interest rate to be paid on the bond

Let's take an example regarding the significance of bond rating

Country A Country B

Triple A rating bond Triple B rating bond

yield rate = 3 percent yield = 6 percent

10 million dollars 10 million dollar

Total interest paid in 10 years = 3 million dollars Total interest paid in 10 years = 6 million

For country B taking a loan for its development is much more difficult due to its lower bond rating.

So let's look at what influences a country's bond rating and why India's bond rating is lower than even countries like The Philippines and Peru. Despite India being the fastest-growing economy in the world, a large young working population, and a stable government why is India still facing this credit crisis?

India bond less attractive than these countries.

Most developed countries have a very high debt to GDP ration which indicates debt is crucial to the development of a country. India cant take debt freely since the repayment is going to be much harder due to the low confidence in its bonds.

Why the credit rating is unfair towards India

1) credit score to GDP growth

This shows the credit score to GDP growth and you can see India is a clear outlier. India is getting over 6 percent GDP growth and still, its credit score is much lower than what it should be

2) Inflation vs credit score

Here you can see the inflation in India is on the lower side and their credit score is much lower than what it is supposed to be.

Looking at multiple graphs such as current account to Credit score and etc show that India is way below the trend line.

The Indian finance ministry has also protested against these "unfair judgments of credit score"

https://indianexpress.com/article/explained/explained-economics/credit-ratings-the-govt-view-9079612/

Reasons Indian bonds might not be so attractive despite its status as the next big hub

1) Currency fluctuation

Here you see a weakening Indian rupee against the dollar every year. These currency fluctuations mean Investors can get better returns investing in other markets due to currency fluctuation

Unlike countries like Singapore which has done fairly well against USD INR is highly fluctuating which means investors are scared to invest in indian ruppee bonds.

2)FDI

India is also not seeing a rising trend in foreign investment which can reduce confidence in the economy this also is a reason for its bad credit score

3)Lack of quantitative data to support growth

There is a lack of quantitative numbers to show growth in these areas and most of them are perceptions.

Moody's Sovereign Rating is a credit rating assigned to sovereign nations to evaluate their creditworthiness and ability to repay debts. The Moody's Sovereign Rating assesses various factors, including economic performance, fiscal policies, political stability, and institutional strength, among others. The rating helps investors and creditors understand the level of risk associated with lending money to a particular country.