Page 127 - ES 2020-21_Volume-1-2 [28-01-21]

110 Economic Survey 2020-21 Volume 1

increased by 64 per cent during the downgrade and fell by 21 per cent next year. Equity and
Debt FPI fell sharply during the downgrade and the next year.

Table 4: Summary of Average Changes in Select Indicators during India’s Threshold
Sovereign Credit Rating Downgrades (Investment Grade to Speculative Grade) (1998-2018)

Indicator During/Post event Short Term Medium Term Long Term

Sensex return During event -4.53% -12% 64%
Post event -0.15% -0.8% -21%
Exchange Rate During event - 4.4% 13%
Post event - 0.12% 3%
G Sec Yield 5 10 Spread 5 10 Spread 5 10 Spread
yr yr yr yr yr yr
During event - - - 0.7% -0.2% -21% - - -
Post event - - - 0.1% 0.2% 2.5% - - -
FPI Flows Equity Debt Equity Debt Equity Debt
During event - - - - -114% -225%
Post event - - - - -1449% -152%
Note: Green indicates positive economic outcome, Red indicates negative economic outcome

3.45 Table 5 presents a summary of average changes in select indicators during India’s threshold
credit rating upgrades (speculative grade to investment grade) between 1998-2018. Threshold
upgrades were correlated with increase in Sensex returns in the medium term and with FPI
(Equity and Debt) in the long term.

Table 5: Summary of Average Changes in Select Indicators during India’s
Threshold Credit Rating Upgrades (Speculative Grade to Investment Grade) (1998-2018)

Indicator During/Post event Short Term Medium Term Long Term
Sensex return During event -1.2% 2.88% 30%
Post event 0.4% 0.76% -5.1%
Exchange Rate During event 0.03% -0.3% -1.4%
Post event -0.02% -0.7% -6.6%
G Sec Yield 5 yr 10 Spread 5 yr 10 yr Spread 5 yr 10 Spread
yr yr
During event - - - 0.4% -0.3% 6% - - -
Post event - - - 1.2% 1.2% 8% - - -
FPI Flows** Equity Debt Equity Debt Equity Debt
During event - - - - 717% 1654%
Post event - - - - 61% 29%
Note: Green indicates positive economic outcome, Red indicates negative economic outcome

MACROECONOMIC INDICATORS AS DETERMINANTS OF
SOVEREIGN CREDIT RATING CHANGES

3.46 We further examine the correlation between select fiscal and macro-economic indicators
of India and episodes of sovereign credit ratings changes. Past episodes of rating changes have