Fitch, one of the top three credit rating agencies of the world has kept (27 April 2018) India’s sovereign rating unchanged at BBB-, the lowest investment grade for the 12th year with stable outlook. Despite giving a stable outlook, it has praised the implementation of the Goods and Services Tax (GST) in India, expressing hope that the new tax will drive the mid-term growth once the teething troubles are resolved. The agency said that the main reason of keeping credit rating at BBB- is India’s weak fiscal balances. It is same credit rating for the 12th year for India by Fitch.
It forecast India’s GDP growth to rebound to 7.3% in FY19 and 7.5% in FY20, as a “temporary drag will fade” caused by demonetisation and the GST in 2016 and 2017 respectively. Fitch said that India’s five-year average real GDP growth of 7.1% is the highest in the APAC region and among ‘BBB’ range peers. However, it pointed out that India’s Per capita GDP is the lowest among its ‘BBB’ range peers.
Fitch said that if the government reduces its debt over the medium term and achieves higher sustained investment and growth rates without the creation of macro imbalances, it would make a strong case for an upgrade in rating. It said that government debt amounted to 69% of GDP in FY18 (while ‘BBB’ median is 41% of GDP), while fiscal slippage of 0.3% of GDP in both FY18 and FY19 relative to the government’s own budget targets of last year, implies a government deficit of 7.1% of the GDP as against ‘BBB’ median: 2.1%.
The rating agency appreciated the Indian government’s measure to tackle NPAs as reflected by government’s decision to announce Rs 2.11 lakh crore for bank recapitalization. However, in the wake of recent fraud at Punjab National Bank, it warned that more capitalization may be needed. It also added that most of the capital injection is likely to be absorbed by losses associated with NPL (non-performing loans) resolution rather than rather than to fund new lending.
It may be recalled that nearly after 14 years another credit rating agency Moody’s had earlier upgraded India’s credit rating to Baa2 from the lowest investment grade of Baa3. However, both Fitch and S&P keep the rating unchanged.
What is credit Rating?
A credit rating is an assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money — an individual, corporation, state or provincial authority, or sovereign government.
A sovereign credit rating is the credit rating of a sovereign entity, such as a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account political risk. A rating expresses the likelihood that the rated party will go into default within a given time horizon. In general, a time horizon of one year or under is considered short term and anything above that is considered long term.
Credit rating is also done in case of a corporation’s financial instruments i.e. debt security such as a bond or a debenture, but also the corporations itself. Thus these institutions also rate corporate units, banks and their debt instruments.
Four most relied credit rating agencies of world
The four relied international credit rating institutions are Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings and DBRS (Dominion Bond Rating Service). They are the only four ratings agencies that are recognized by the European Central Bank (ECB) for determining collateral requirements for banks to borrow from the central bank. These are only four rating agencies which have received ECAI recognition from the European Central Bank (ECB). That designation indicates CRAs whose ratings can be used by the ECB to determine collateral requirements for borrowing from the ECB. In recent years, DBRS’s sovereign ratings on European nations, including Portugal, Ireland and Italy, were used by the ECB for such purposes. The ECB uses a first, best rule among the four agencies that have the designated ECAI status, which means that it takes the highest rating among the four agencies – S&P, Moody’s, Fitch and DBRS – to determine haircuts and collateral requirements for borrowing. Ratings in Europe have been under close scrutiny, particularly the highest ratings given to countries like Spain, Ireland and Italy; because they affect how much banks can borrow against sovereign debt they hold.
The symbols used for credit Rating
While Moody’s, S&P and Fitch Ratings control approximately 95% of the credit ratings business, they are not the only rating agencies. DBRS’s long-term ratings scale is somewhat similar to Standard & Poor’s and Fitch Ratings with the words high and low replacing the + and −. It goes as follows, from excellent to poor: AAA, AA (high), AA, AA (low), A (high), A, A (low), BBB (high), BBB, BBB (low), BB (high), BB, BB (low), B (high), B, B (low), CCC (high), CCC, CCC (low), CC (high), CC, CC (low), C (high), C, C (low) and D. The short-term ratings often map to long-term ratings though there is room for exceptions at the high or low side of each equivalent.