Generally, in debt markets, investors are asked to check an issuer’s creditworthiness before investing in an instrument raised by the issuer, rated by credit rating agencies like ICRA, CARE, and CRISIL in India. The same holds for countries alike where they have been given sovereign credit ratings by agencies like Fitch, S&P, and Moody’s.
India has a credit rating of BBB- by Fitch, BBB- by S&P, and Baa3 by Moody. So, what does this mean for an investor?
The Credit Ratings will Influence Borrowing Cost
The credit rating can generally impact the rate at which debts can be issued; a higher credit rating means cheaper borrowing costs for the issuer.
There is no doubt about how India is talked about among the people for its fastest economic growth and standing as one of the fifth largest in the world. It is a moment of pride for the citizens to see the economy growing.
As a developing country, attracting foreign investors means much to growing the economy, and a good credit rating can mean much to borrowing. India questions the credit rating agencies about its dissatisfaction rating despite being the fastest-growing economy consistently, even while facing the biggest economic turmoil like the COVID pandemic and having a track record of zero sovereign default history.
Credit Ratings Demystified: The Indian Context!
How Does Credit Rating Work?
The credit rating agencies rate companies and governments for their credit risk from AAA to D. On a change in sentiment from a financial standpoint, the CRAs can alter the outlook, keeping the rating as is.
For Fitch, the rating works from AAA being the highest investment grade to the lowest investment grade of BBB – and D being the least signifying speculative grade. With additional margins in between projecting the differences.
The same holds for the S&P, like that of Fitch. Meanwhile, for Moody, the ratings seem like Aaa to D.
| Fitch and S&P Ratings | Moody Ratings |
|---|---|
| AAA | Aaa |
| AA+ | Aa1 |
| AA | Aa2 |
| AA- | Aa3 |
| A+ | A1 |
| A | A2 |
| A- | A3 |
| BBB+ | Baa1 |
| BBB | Baa2 |
| BBB- | Baa3 |
| BB+ | Ba1 |
| BB | Ba2 |
| BB- | Ba3 |
| B+ | B1 |
| B | B2 |
| B- | B3 |
| CCC+ | Caa1 |
| CCC | Caa2 |
| CCC- | Caa3 |
| CC | Ca |
| C | C |
| D | D |
The rating is evaluated based on parameters like inflation, current account balance, GDP growth rate, general government debt, inflation, cyclically adjusted primary balance, rule of law, short-term external debt, political stability, investor protection, reserve adequacy ratio, control of corruption, ease of doing business, and sovereign data history.
How to Analyse the Credit Worthiness of Corporate Bonds?
The Response of Credit Rating Agencies to India’s Credit Rating
Here’s what the agencies have to say regarding their ratings:
Fitch
Fitch has given BBB- a rating that projects a stable outlook—the lowest investment grade rating. Fitch points out that India has high debts and a high deficit.
“A high deficit refers to increased expenditure than the collected revenue by a government. A high debt may arise to cover the excess expenditure as the government borrows money through debt instruments with higher interest payments.”
Adding to the above, Fitch mentions that indicators such as World Bank governance and structural indicators are lagging, including growth per capita.
“It means that indicators measured by the World Bank have fallen behind where shortcomings in structural policies, governance, and economic performance can be witnessed, suggesting improvements in the reforms to improve the overall economic performance. “
While it forecasts a fastest growth rate of 6% in the fiscal year 2024 compared to its peers, the growth might face challenges from higher interest rates, meaning higher borrowing costs suppressing economic activities, higher inflation rates evaluating the purchasing power of a consumer, external limitations in exports, and a facing driving force of demand. Due to this, a rebound to 6.7% growth in fiscal 2025 can be seen from its projected growth of 7% in fiscal year 2023, following a recovery in subsequent years.
It also states that stronger investment growth can be seen due to positive performance from a bank and the private sector’s growing balance sheet, supported by the government’s infrastructure initiatives, but a risk of lower participation from the labor force and uneven reforms can be seen.
Indeed, a large domestic market will attract foreign companies, but the question is whether India will propose sufficient reform to benefit from such opportunities.
Continuing with it, India commits to retaining 4.5% of GDP’s CG deficit without explaining how it would achieve it. Meeting the budget targets seems highly unlikely, projecting a consolidation path.
It has been noted that India’s general government debts are elevated compared to a median value of 55.4% in a BBB rating. This is still partially mitigated by relying on something other than external financing.
If a government fails to reduce its debt consistently, it can face problems with a negative credit rating during recessionary periods. The higher interest payments ratio of 27% is higher than the BBB rating’s median of 7%.
Thus, there is a need to narrow the current deficit, improve the financial sector, moderate inflation, and incorporate ESG governance to achieve significant growth.
Moody
Moody’s gives India a grade (Baa3) and says, “Things seem stable for now.” This grade suggests a moderate risk level with credit.
Moody’s sees India’s economy growing faster than many other big economies, even though it’s slower than before. They notice India’s potential to produce goods and services is lower than before the pandemic hit.
However, there are concerns. Moody’s worries about institutions getting weaker and political tensions rising, especially referring to recent unrest in certain regions. This, coupled with reduced civil activities and political disagreements, adds more risk, in their view.
While Moody’s acknowledges that India is growing better, they also warn about the possibility of rising prices (inflation) and interest rates. This could make it tricky for the government to control spending, especially when it’s already dealing with a fair amount of debt.
The Wrap
Despite the growth, these factors may hinder future growth or create uncertainties in how India is headed, as per the agencies, backed by numbers or observations.
Although BBB- and Baa3 still have investment-grade ratings, they are lower than higher investment-grade ratings but much higher than lower-grade ratings, projecting a stable outlook and adequate payment capacity to repay the debt obligations.
