Reforming Sovereign Credit Ratings – UPSC GS3

The Economic Survey 2020-21 concludes that the sovereign credit ratings are biased and they do not reflect the Indian economy’s fundamentals.
  • Currently, India’s sovereign rating is rated under a very low investment grade.
  • Though it will not have impact on market performance, rupee value against the dollar, or on G-Sec yield. But it can impact the FPI inflow into equity and debt instruments.
On what basis the economic survey has made this remark?
  • As per the survey, it is for the first time in history that India, which is the fifth-largest economy in the world, has been rated as low in the investment-grade (BBB-/Baa3).
  • Historically, the fifth-largest economies have been mostly rated AAA. It reflects the economic size and its ability to repay debt. China and India are the only exceptions to this rule.
What is the solution to address this issue?
  • The economic survey suggested reworking the sovereign credit rating methodology to make it more transparent and less subjective.
  • It also called for co-operation among developing economies to address this bias and subjectivity, inherent in sovereign credit rating methodology.
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