As India gets its grades by Moody’s and Standards & Poor. Let’s simplify the concept of Sovereign rating

India gets its grades by Moody’s and Standards & Poor

24/11/2017 New Delhi, Standards and Poor on Friday rates India to “BBB-minus” sovereign rating and “stable” outlook for India, referring low income levels, high debt and frail government finances which does not follow similarly to Moody’s India’s sovereign issuer rating to Baa2 from Baa3 with a ‘stable’ outlook.

Let us have a look at what these rating agencies are and why do they matter to India.

What is global credit rating?

A global credit rating agency like Moody’s and Standards & Poor and Fitch rank a country’s ability to repay debt. This is called sovereign bond rating. We would wonder why any government would be under debt. Well is due to a simple fact that most of government spend more money on activity like welfare schemes, subsidies and administration activity etc. and comparatively earn less income from cess, profits, tax etc. that results in borrowing to compensate the deficit which is done through issue of treasury bills, bonds, promise of repayment of principal amount and interest at a date proposed.

Every rating agency follows a different parameters and scale to identify how much credit worthy can a country be.

 These rating range from A-D series similar to any school report card grading system.

Why sovereign ratings matter to India?

Sovereign ratings determine the cost of borrowing. This rating acts as a yard stick for other borrowers in the country. An improvement or decline in the grades affect the cost of borrowing for companies and individual who are particular to raise money from international market.

The grades indicate a clear level and scope of the country’s prospects since it is an important parameter of the country’s fiscal and financial health. International investors rely on these grades before they make their foray into direct and portfolio investment of any company that belongs to India.

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