In Fact: Ratings upgrade lifts mood, but key economic tasks remain

In Fact: Ratings upgrade lifts mood, but key economic tasks remain(Indian Express)

Context:

• Historically Global credit rating agency Standard & Poor’s and Moody’s has not been soft on India, but recently India’s credit rating has been upgraded.

What are the ratings based on?

The ratings are based on:

• economic growth and prospects;
• the ability to repay debt obligations on time;
• the level of public debt, especially compared to peers;
• political stability which, in turn, is believed to have the potential to lead to economic and institutional reforms;
• strength of the financial sector and banks;
• monetary policy and the size of foreign exchange reserves, which determine the ability to repay foreign debt, etc.

What are the resaons behind the degration of India’s credit rating?

• As the size of the country’s economy and its foreign exchange reserves have grown and many sectors have been deregulated, the reluctance of the agencies to raise India’s credit rating has displeased successive governments.
• During the 2008 financial crisis, the agencies were widely criticised for failing to foresee the housing mortgage collapse which added to the distrust.
• As the agencies’ credibility took a beating, and abundant capital flowed to emerging markets, actions taken by the raters were seen as having only limited impact.
• A disconnect has been visible between the ratings and the perception and investment behaviour of foreign investors in Indian stocks and debt.
• The global ratings agencies have been inconsistent in their treatment of China and India.
• The agencies have been criticised for being detached from ground realities in India, and suggested that they introspect.