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.
