Highlights

  • Urgent reforms and transparency required in credit rating methodology: CEA Office
  • Methodology heavily loaded against developing nations like India: Re-examining Narrative

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Rating agencies methodology against India, reforms mandatory: Chief Economic Advisor

The book Re-examining Narrative which has 5 essays has pointed out that methodology for Soverign credit rating does not consider any improvement in macro-economic parameters if qualitative parameters are judged to be in need of improvement

Rating agencies methodology against India, reforms mandatory: Chief Economic Advisor

The office of Chief Economic Advisor (CEA) in the Ministry of Finance, has expressed its displeasure over the methodologies to determine the sovereign credit rating adopted by the rating agencies such as Fitch, Moody’s and S&P. It has called the methodology heavily loaded against developing nations like India and has urged for reforms and transparency in the process of sovereign credit rating.

In an essay ‘Understanding a Sovereign’s Willingness to Pay Back: A Review of Credit Rating Methodologies', CEA mentions that the methodology is heavily loaded due to an “over-reliance” on non-transparent and subjective qualitative factors.

Re-examining Narrative - Book

The book Re-examining Narrative has a total of 5 essays one of which is ‘Understanding a Sovereign’s Willingness to Pay Back: A Review of Credit Rating Methodologies'.

The preface for the book has been written by V Anantha Nageswaran, Chief Economic Advisor, and Rajiv Mishra, Senior Advisor, Ministry of Finance.

Also Read: Moody's downgrades China's credit outlook to 'negative' amid economic uncertainty

In the essay, the CEA's office has pointed out that the rating agencies' perception and value judgement ends up weighing much more than the country's actual macroeconomic fundamentals.

The essay while noted that India's growth from 12th largest economy in 2008 to 5th in 2023 has made no relatable impression on the rating agencies. It goes on to say that any improvemnet in macro-economic parameters does not matter if qualitative parameters are judged to be in need of improvement.

“The rating of India during the last 15 years remained static at BBB- during the last 15 years, despite it climbing the ladders from the 12th largest economy in the world in 2008 to the 5th largest in 2023, with the second-highest growth rate recorded during the period among all the comparator economies. Thereby, any improvement in macro-economic parameters may virtually mean nothing for a credit rating if qualitative parameters are judged to be in need of improvement. This has serious implications for developing sovereigns’ access to capital markets and ability to borrow at affordable rates,” the essay said.

The essay also points out that the methodologies used by the rating agencies have an “enormous degree of opaqueness”, and called for far greater transparency and reforms in the ratings process. It claimed that the “qualitative” and subjective perceptions about governance and institutional strength surpass “the collective influence of all other macroeconomic fundamentals” when it comes to the chances of earning India and other developing economies a rating upgrade

Recommendations for credit rating

The essay goes on to recommend that the credit rating must rely on a country’s debt repayment history to determine its ‘willingness to pay’, instead of “less-than-optimal” qualitative information.

“…there cannot be any better-revealed preference for willingness and determination to pay back a country’s debt obligations than its repayment history itself. Thus, a nation that has not defaulted throughout its external debt history and through the vicissitudes of its socio-economic development should be taken as fool-proof in its ‘willingness to pay’ back,” it said.


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