Page 126 - ES 2020-21_Volume-1-2 [28-01-21]

Does India’s Sovereign Credit Rating reflect its fundamentals No! 109

Table 3: Summary of Average Changes in Select Indicators during
India’s Sovereign Credit Rating Upgrades (1998-2018)

Indicator During/Post event Short Term Medium Term Long Term
Sensex return During event -0.7% 2% 36%
Post event 0.2% 1.8% 13%
Exchange Rate During event -0.05% -0.29% -1.5%
Post event -0.03% -0.36% -2.3%
G Sec Yield 5 yr 10 yr Spread 5 yr 10 yr Spread 5 yr 10 Spread
yr
During event - - - 0.2% -0.5% -5% - - -
Post event - - - 0.6% 0.7% 5% - - -
FPI Flows Equity Debt Equity Debt Equity Debt
During event - - - - 264% 286%
Post event - - - - 303% 578%
Note: Green indicates positive economic outcome, Red indicates negative economic outcome

3.42 In the long term, during India’s sovereign credit ratings upgrade, Sensex return on average
rose by around 36 per cent over the previous year and grew at an average rate of 13 per cent
in the next year. Exchange rate (INR/USD), on average, appreciated by around 1.5 per cent
over the previous year during the rating upgrade, and appreciated by two per cent in the next
year. FPI Equity, on average, increased by 264 per cent over the previous year during the rating
upgrade, and grew by 303 per cent the next year. Average FPI Debt too followed a similar
pattern, increasing by 286 per cent, on average, during the rating upgrades, and grew at an
average rate of 578 per cent the next year (Table 3).

Effect of India’s Threshold Sovereign Credit Rating Changes

3.43 India witnessed one instance of credit rating downgrade from the investment grade to
speculative grade during the period 1998-2018. This coincided with the period of international
sanctions following the Pokhran nuclear tests in 1998. India witnessed three instances of credit
ratings upgrade from the speculative grade to the investment grade. These were in mid 2000s,
as testament to India’s higher economic growth prospects and strong fundamentals.
3.44 Table 4 presents a summary of average change in indicators during India’s threshold
sovereign credit rating downgrade (investment grade to speculative grade) between 1998-2018.
In the short term, this downgrade was negatively correlated with Sensex return, which declined
by five per cent during the downgrade and declined by 0.2 per cent over the next two weeks. In
the medium term, Sensex return declined by 12 per cent during the event and declined by 0.8 per
cent over the next six months. Exchange rate depreciated by four per cent during the downgrade
and depreciated by 0.1 per cent over the next six months. Yield on 5-year government securities
increased by 0.7 per cent during the downgrade and 0.1 per cent over the next six months. Yield
on 10-year government securities fell by 0.2 per cent during the downgrade and increased by 0.2
per cent over the next six months. Spread (RHS) fell by 21 per cent during the downgrade and
increased by 2.5 per cent over the next six months. In the long term, exchange rate depreciated
by 13 per cent during the downgrade and depreciated by three per cent next year. Sensex return