Page 132 - ES 2020-21_Volume-1-2 [28-01-21]

Does India’s Sovereign Credit Rating reflect its fundamentals No! 115

in explaining India’s sovereign credit ratings downgrades during 1998-2019. Only consumer
price inflation is found significant in explaining India’s sovereign credit ratings upgrades during
1998-2019.

Table 6: Probit Regression Credit Ratings Downgrade and Upgrade
(1) (2)

Dependant variable: Dependant variable:
VARIABLES Credit Rating Downgrade Credit Rating Upgrade

Real GDP Growth -0.0036 0.0135
(0.0274) (0.0219)
Fiscal Deficit 1.422*** -0.135
(0.520) (0.108)
Consumer Price Inflation 0.150** -0.391***
(0.0747) (0.104)
Constant -14.72*** 2.356**
(4.777) (0.938)
Observations 84 84
Wald chi2 (3) 9.325 16.47
Prob > chi2 0.0253 0.0009
Pseudo R2 0.4257 0.2334
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

POLICY IMPLICATIONS

3.54 The Survey questioned whether India’s sovereign credit ratings reflect its fundamentals,
and found evidence of a systemic under-assessment of India’s fundamentals as reflected in its
low ratings over a period of at least two decades. India’s fiscal policy must, therefore, not remain
beholden to such a noisy/biased measure of India’s fundamentals and should instead reflect
Gurudev Rabindranath Thakur’s sentiment of a mind without fear. In other words, India’s fiscal
policy should be guided by considerations of growth and development rather than be restrained
by biased and subjective sovereign credit ratings.

3.55 While sovereign credit ratings do not reflect the Indian economy’s fundamentals, noisy,
opaque and biased credit ratings damage FPI flows. Sovereign credit ratings methodology
must be amended to reflect economies’ ability and willingness to pay their debt obligations by
becoming more transparent and less subjective. Developing economies must come together to
address this bias and subjectivity inherent in sovereign credit ratings methodology to prevent
exacerbation of crises in future.

3.56 The pro-cyclical nature of credit ratings and its potential adverse impact on economies,
especially low-rated developing economies must be expeditiously addressed. India has already
raised the issue of pro-cyclicality of credit ratings in G20. In response, the Financial Stability Board
(FSB) is now focusing on assessing the pro-cyclicality of credit rating downgrades.