- Global ratings agency S&P has retained India’s sovereign credit rating at BBB (minus) with a stable outlook for the 13th year in a row.
- The rating agency had in 2007 assigned a ‘BBB-’ rating to India and has been maintaining a stable outlook on India since September 2014.
- It pointed out that ongoing economic reforms, if executed well, should keep the country’s growth rate ahead of peers, although risks to the country’s long-term growth rate are rising.
- The affirmation from S&P comes at a time when the economy is facing a deep contraction in growth as the lockdown to prevent the spread of Covid-19 has hurt key sectors of the economy.
In Focus: S&P Global Ratings
- S&P Global Ratings (previously Standard & Poor’s) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities.
- S&P is considered one of the Big Three credit-rating agencies, which also include Moody’s Investors Service and Fitch Ratings.
- As a credit rating agency (CRA), the company issues credit ratings for the debt of public and private companies, and other public borrowers such as governments and governmental entities.
- It is one of several CRAs that have been designated a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission.
- S&P issues both short-term and long-term credit ratings. The long-term credit ratings are issued on a scale from AAA to D and short-term credit ratings are issued on a scale from A-1 to D.
How are ratings done?
- Credit rating agencies rate the financials and business models of companies, as well as economic management by sovereign governments.
- It analyses official and other data and interacts with government officials, business leaders, and economists, while doing so.
- The agencies then rate instruments such as bonds, debentures, commercial papers, deposits, and other debt offerings of companies or governments to help investors make informed decisions.
- The agencies do this on a continuous basis, either upgrading or downgrading the instrument based on performance, prospects, or events likely to have an impact on the balance sheet or the fiscal position.
Observations by S&P Global Ratings:
- S&P Global Ratings has forecast India’s economy to shrink by 5 per cent in the current fiscal. It, however, has projected GDP growth to be 8.5 per cent in 2021-22 and 6.5 per cent in 2022-23.
- Affirming ‘BBB-’ long-term and ‘A-3’ short-term credit ratings on India, S&P said it reflects the country’s above-average real GDP growth, sound external profile, and evolving monetary settings.
- However, new risks are emerging that could weaken the economy’s recovery, even beyond the containment of Covid-19.
- Productive capacity has been severely disrupted during this period, and millions of workers have left their jobs to return home. India’s labour markets have therefore weakened dramatically, and may take some time to heal.
- S&P said the economic hit from Covid-19 will worsen India’s weak fiscal settings, but the country will get into the path of fiscal consolidation over the next three years.
Significance of the ratings:
- From a company’s or a government’s perspective, a better rating helps raise funds at a cheaper rate.
- It has an impact on companies planning to borrow overseas through bonds or foreign loans, as investors or banks abroad may well seek higher interest rates because of weak prospects.
- Hence, firms and many governments that borrow from the international markets are mindful of rating downgrades.
- The current S&P review will give relief to policy makers and financial markets participants, especially after a recent downgrade by Moody’s heightened risks of India slipping into a non-investment grade rank.