Page 110 - ES 2020-21_Volume-1-2 [28-01-21]

Does India’s Sovereign Credit Rating reflect its fundamentals No! 93

Index (CPI) inflation (Figure 6) across India’s sovereign credit ratings cohort. It may be seen
that India is a negative outlier, rated much below expectation for its level of CPI inflation.

Figure 5: Sovereign Credit Ratings and Figure 6: Sovereign Credit Ratings
GDP Growth Annual (Per cent) and CPI Inflation (Per cent)

6 6

Average rating (1=BBB−/Baa3 to 6=A+/A1) 4 3 Ordinal scale Average rating (1=BBB−/Baa3 to 6=A+/A1) 3 Ordinal scale 4
5
5

2
2
India India
1 1

0 2 4 6 8
0.0 2.5 5.0 7.5 10.0 CPI Inflation (%, YoY)
GDP growth (%, YoY)
Source: Bloomberg and IMF Source: Bloomberg and IMF
3.9 Figure 7 shows a negative correlation between sovereign credit ratings and general
government gross debt (as per cent of GDP) across India’s sovereign credit ratings cohort.
India is a negative outlier and is currently rated much below expectation for its level of general
government gross debt (as per cent of GDP).

3.10 No clear correlation is observed between sovereign credit ratings and cyclically adjusted
primary balance (per cent of potential GDP) across India’s sovereign credit ratings cohort
(Figure 8). India remains a negative outlier, currently rated much below expectation for its level
of cyclically adjusted primary balance (per cent of potential GDP).

Figure 7: Sovereign Credit Ratings Figure 8: Sovereign Credit Ratings
and General Government Gross Debt and Cyclically Adjusted Primary
(per cent of GDP) Balance (per cent of Potential GDP)

6 6
5
Average rating (1=BBB−/Baa3 to 6=A+/A1) 3 Ordinal scale 4 Average rating (1=BBB−/Baa3 to 6=A+/A1) 4 3 Ordinal scale
5

2

2
1 1
India India

50 100 150 200 −7.5 −5.0 −2.5 0.0
General Govt. Gross Debt (% GDP) Cyclically Adjusted Primary Balance (% Potential GDP)
Source: Bloomberg and IMF Source: Bloomberg and IMF