Page 112 - ES 2020-21_Volume-1-2 [28-01-21]

Does India’s Sovereign Credit Rating reflect its fundamentals No! 95

3.14 A positive correlation is observed between sovereign credit ratings and government
effectiveness (Figure 12) across India’s sovereign credit ratings cohort. India remains a negative
outlier, rated much below expectation for its level of government effectiveness.

Figure 13: Sovereign Credit Figure 14: Sovereign Credit
Ratings and Rule of Law Ratings and Control of Corruption

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

2
2

1
India 1 India

−0.5 0.0 0.5 1.0 1.5 −0.5 0.0 0.5 1.0 1.5
Rule of Law Index Control of Corruption Index
Source: Bloomberg and World Bank Source: Bloomberg and World Bank
3.15 Figure 13 shows a positive correlation between sovereign credit ratings and rule of law
across India’s sovereign credit ratings cohort. India is again a negative outlier, currently rated
much below expectation for its level of rule of law.

3.16 A positive correlation is observed between sovereign credit ratings and control of corruption
(Figure 14) across India’s sovereign credit ratings cohort. India is a negative outlier and is rated
much below expectation for its level of control of corruption.

Figure 15: Sovereign Credit Ratings and Short Figure 16: Sovereign Credit Ratings
Term External Debt (as per cent of Reserves) and Reserves Adequacy Ratio

6 6

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

2
2
India
1 1
India

2
0 50 100 1 Reserves Adequacy Ratio 3
Short Term External Debt (% Reserves)
Source: Bloomberg and World Bank Source: Source: Bloomberg and IMF
3.17 Sovereign credit ratings, as a reliable measure of economies’ ability to pay, would be
expected to be lower for countries with higher short-term debt as per cent of reserves. However,
this is not the case for India’s cohort! Figure 15 shows a positive correlation between sovereign