09 Jan Credit rating Agencies
Credit rating Agencies
The article talks about how Credit Rating Agencies impact the Indian Economy
Relevance for Prelims: Credit rating Agency, Implications of ratings
Relevance for Mains: Significance of CRA’s
Recently, The Finance Secretary to the Union Government of India accused Credit Rating Agencies of double standards while assessing developing and emerging economies.
Sovereign Credit Ratings (SCR) are given on the relative ability and potential of the government to meet its financial commitments. i.e., the ability to service their debt. The ratings are issued by assessing overall economic and political stability which is extrapolated from the publicly available data and confidentially given by other currency banks regarding forex reserves and transparency in the market.
Reasons for differing views between Government and Credit Rating Agencies
- Credit rating Agencies are of the view that India is one of the most indebted developing economies. It does not have any clarity on long-term fiscal consolidation and has fuelled growth with Budgetary Support. The Fiscal Deficit has been continuously deteriorating.
- On contrary, Government contends that it has a zero sovereign default history. Not only India has passed the recession but witnessed a V-shaped recovery. It has the fourth largest forex reserves in the world and at all times- high at $ 640 Billion. The country ranked in World Ease of Doing Business at an unprecedented rate from 100 to the top 30.
Impact of poor ratings
- Reduce the investors’ confidence: The decrease in rating agencies deteriorates the country’s financial system image and acts as a deterrence for investors.
- Increase the Premium on Interest Rates: Poor ratings increases risk perception, compelling governments to increase the rate on bonds.
- Policy Repercussions: The country formulates the policy in order to improve its rating not on the basis to increase growth and development.
- Isolated Debt Market: Companies and firms face a lot of difficulties to borrow money from the international market.
Steps were taken by India to make rating agencies accountable
- Disclose rating history.
- Disclose liquidity position.
- Narrowed disclosure standards.
- Reveal the source of funding.
The economic survey recommended that developing economies like India should be guided by consideration of development and growth and rather ignore the subjective and one-sided ratings.
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