Reassessing Perspectives: A Compilation of Essays by the Finance Ministry

Subject :Economy

Section: External Sector

Context:

Reassessing Perspectives, a compilation of essays by the Finance Ministry aims to spotlight concerns regarding the methodologies employed by major global credit rating agencies and their adverse impact on India.
It underscores the necessity for credit rating agencies (CRAs) to reform their sovereign rating processes, particularly in accurately representing the default risk of developing economies.

More In News:

Need for Reform: The Chief Economic Adviser of the government emphasizes the imperative for credit rating agencies to reform their sovereign rating processes to better reflect the default risk of developing economies.
India’s Current Rating: Despite substantial improvements in economic metrics since the onset of the pandemic, India holds the lowest investment grade.
Enhancements in macroeconomic indicators may have minimal impact on credit ratings if qualitative parameters are perceived to require improvement, significantly affecting developing sovereigns’ access to capital markets and their ability to borrow at reasonable rates.

About Credit Rating Agencies (CRAs):

Functions of CRAs: These agencies assess the financial strength of companies and government entities, especially their ability to meet principal and interest payments on debts.
They provide investors with crucial information about bond and debt instrument issuers, including countries’ sovereign debts.
CRAs in India: Presently, India has seven registered CRAs, namely CRISIL, CARE, ICRA, SMREA, Brickwork Rating, India Rating and Research Pvt. Ltd.
Global Credit Rating Industry: The global credit rating industry is highly concentrated, dominated by three leading agencies: Moody’s, Standard & Poor’s, and Fitch.
Different Credit Rating Scales: Credit ratings use alphabetical symbols (AAA, AA, A, B, etc.) to assess the creditworthiness of corporate financial instruments.
Higher ratings indicate lower default risk, with AAA being highly favorable. Ratings below BB are considered indicative of poor creditworthiness.

About Sovereign Credit Rating:

Sovereign Credit Rating: It measures a government’s ability to repay its debt, with a low rating indicating high credit risk.
Determinants for Rating: Factors considered include growth rate, inflation, government debt, short-term external debt as a percentage of GDP, and political stability.
Sovereign Credit Rating of India: While S&P and Fitch rate India at BBB, Moody’s rates India at Baa3, indicating the lowest possible investment grade.
This is despite India’s progress from being the 12th largest economy globally in 2008 to the 5th largest in 2023, with the second-highest growth rate among all comparator economies during this period

SEBI Regulations, 1999:

Regulation of Functioning:
- In India, the Securities and Exchange Board of India (SEBI) primarily regulates credit rating agencies under the SEBI Regulations, 1999 of the SEBI Act, 1992.
- Other regulatory agencies, such as the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority, and Pension Fund Regulatory and Development Authority, also regulate certain aspects of credit rating agencies within their respective sectoral jurisdictions.
Disclosure-based Regulatory Regime:
- The SEBI (Credit Rating Agencies) Regulations, 1999 establish a disclosure-based regulatory regime, requiring agencies to disclose their rating criteria, methodology, default recognition policy, and guidelines for dealing with conflicts of interest.