India will likely retain its position as the fastest-growing large economy for the third successive year in 2024-25. Besides price stability, which has been achieved even under difficult global conditions, the post-covid fiscal rollback has been smooth because there were few cash giveaways. The upward adjustment of the monetary policy rate was done smoothly; it did not upset India’s growth momentum, unlike in the West, where higher policy rates are going against growth. India is receiving high foreign direct investment. Foreign portfolio investor interest too is high, given this year’s inclusion of Indian government bonds in the JPMorgan Bond index for emerging markets. Investors are more than eager to put their money on the table when it comes to India. Yet, our credit rating remains on the precipice of just about being investment grade. Clearly, something is amiss.
There is a consensus that there needs to be more competition in the credit rating space post-Lehman. But progress has been limited, even though attempts have been made by agencies in different countries to form new outfits based on partnerships. Sovereign ratings are still the hallowed domain of the Big Three ratings companies.
The main issue is one of acceptability. Investors should accept the ratings given by a rating agency. While domestic agencies do well in their domain of company ratings, the challenge is assigning sovereign ratings, and for these to find acceptance across geographies. Making a breakthrough on this is difficult, but not impossible. There have been some alliances, like ARC Ratings, which was set up by five domestic rating agencies including Care Ratings from India, which had a licence to operate in Europe. But the sovereign ratings business has not taken off. There were unsuccessful attempts in other geographies too.
The solution lies in more large domestic rating agencies issuing sovereign ratings. The methodologies need to be thorough, backed by a strong rationale. The ratings must be made public to obtain ratification from experts. Next, local central banks need to accept such ratings. The Reserve Bank of India (RBI) has a capital adequacy framework that requires weights to be given to different assets based on ratings assigned by credit-rating agencies. For domestic assets, it is in accordance with Basel 2 norms for an external domestic agency providing the same. However, Indian banks with overseas branches do invest in treasury bills of the sovereign. Or it could have dealings with foreign central banks, public sector entities and foreign banks. Here, RBI accepts the ratings of S&P, Moody’s and Fitch Ratings. The question is why not also accept those given by accredited domestic credit rating agencies? Note that three of India’s largest four rating agencies are part of the global Big Three and would not be in a position to offer separate ratings. The fourth, which is CARE Ratings, can be nudged, as also the other two other smaller agencies, to venture into sovereign ratings.
When it comes to ratings, there are broadly two areas that require such assignment. One, the debt market, and two, bank loans under Basel norms. Sovereign ratings form a different arena that covers the entire globe and is run by a virtual oligopoly. It’s critical that domestic central banks accept sovereign ratings from domestic agencies to help them gain credibility.
These agencies can do similar assignments in other countries. In fact, when global deliberations take place, such as G20 or BRICS meetings, this could be an issue to discuss. Maybe 2-3 rating agencies could get global acceptance. India’s IFC has grown to become a wholesome one-stop shop for all global transactions, and putting in this last piece of sovereign ratings would complete its offer basket. These ratings can also be used when there are deals made that need such data.
It has been observed that even a decade-and-a-half after the global financial crisis, nothing has quite changed in the rating space. There are incongruities like the US, which has perennially been on a point of a government shutdown, continuing to enjoy high ratings (though one agency has lowered the US to AA plus). Others that get into a recession for protracted periods do not witness any downgrade. While the argument of being an anchor currency is used to defend such oddly high ratings, there need to be limits.
On the other hand, countries like India which record big improvements on almost all parameters even over a consistent period of five years rarely witness an upgrade . The arguments given, such as inadequate labour reforms, privatization and high debt levels, are rarely used for countries in the West. The per-capita income argument is flawed, as one needs to look at growth rather than absolute levels, since the latter will always be optically low with a large population.
More conversation is needed at both the government and central bank levels. Global summits that have agendas related to politics and climate action should add this for discussion. What central banks do would be critical. Should RBI and others show recognition of sovereign ratings given by domestic agencies, the practice would spread. India can take pride in having competent local rating agencies and a strong regulatory structure put up by the Securities and Exchange Board of India even before the financial crisis. There is little reason to only look outside. Domestic players must get space to prove their expertise.
These are the author’s personal views.
