Why in news?
India’s credit rating has recently been upgraded to Baa2 by a global rating agency.
What is a credit rating?
- A credit rating is an assessment of the creditworthiness of a borrower.
- Individuals, corporations and governments are assigned credit ratings, whoever wants to borrow money.
- Individuals are given ‘credit scores’, while corporations and governments receive ‘credit ratings’.
- National governments, not countries, are assigned credit ratings by agencies like Standard & Poor’s, Moody’s and Fitch.
How this rating is calculated?
- Governments require ratings to borrow money, they are given ratings on their worth as investment destinations.
- This is done to position itself as a destination for foreign direct investment.
- A country requests a credit rating agency to evaluate its political risks and economic environment such as taxation, currency value and labour laws.
- Another is sovereign risk where a country's central bank can change its foreign exchange regulations.
- These risks are taken into account and ratings assigned accordingly.
What does the ratings implies?
- Baa1 - The highest rating of speculative grade Moody's Long-term Corporate Obligation Rating.
- Obligations rated Ba1 are judged to have speculative elements and are subject to substantial credit risk.
- Baa2 - Obligations rated Baa2 are subject to moderate credit risk.
- They are considered medium grade and as such may possess certain speculative characteristics
What is the rating for India?
- Moody's Investor Service upgraded the Government of India's local and foreign currency issuer ratings by two notches, to Baa2 stable from Baa3 positive.
- Baa2, a term that means that they consider the economy stable.
- In simple terms, it means the cost of capital will reduce and more FDI is expected to flow in, as certain investors don't invest in countries rated below Baa3.
- The last upgrade had happened in 2004, when Moody's had upgraded India's status to Baa3, which is the lowest investment grade and just a notch above junk status.
- Other rating agencies Standard & Poor’s and Fitch too have a ‘stable’ rating for the country BBB+ and BBB-, respectively.
Source: The Hindu, Business Times
