Ratings agency Moody’s downgraded India’s long-term issuer and Indian local currency ratings from Baa2 to Baa3, maintaining a negative outlook, citing a prolonged period of weak growth and further deterioration in the government’s budget situation.

Baa3 is the second lowest investment rating on the Moody’s rating scale. This means that India is just a cut above the non-investment grade or unwanted category. The rating agency expects the country’s GDP to contract by 4% in the current fiscal year due to the impact of the pandemic and the associated closure measures. However, GDP growth is expected to rebound in the next fiscal year to 8.7% and to approach 6% the following year.

Previously Moody’s raised the country’s rating to Baa2 in November 2017.  The rating agency said economic growth slowed to decrease the government’s ability to reduce its debt burden and the pandemic to increase its debt burden to around 84% of GDP during the year ongoing, compared to 72%.

What is Credit Rating?

A credit rating is a quantified assessment of the borrower’s creditworthiness in general terms or in relation to a particular debt or financial obligation. A credit score not only determines whether a borrower will be approved for a loan or debt issue, it also determines the interest rate at which the loan will be repaid.  

A credit score can be assigned to any entity seeking to borrow money for an individual, a company, a state or provincial authority, or a sovereign government. Individual credit is evaluated on a numerical scale based on the FICO calculation; Bonds issued by companies and governments are rated by credit agencies using a letter system.

Why we need credit rating?

we need such rating in view of taking loan or debt, essentially it is a promise, often contractual, and a credit rating determines the probability that the borrower is able and willing to repay a loan within the limits of the loan agreement, without default.

A high credit rating indicates a great possibility to pay the loan in full without any problem; A low credit rating suggests that the borrower has had trouble repaying his loans in the past and may follow the same trend in the future.

The credit rating affects the entity’s chances of being approved for a given loan or receiving favorable terms for that loan. while credit score only affect Individos, sovereign credit ratings affect national governments, while corporate credit ratings are considered for companies.

Types of credit ratings

A short-term credit rating reflects the borrower’s probability of default during the year. This type of credit rating has become the norm in recent years, while long-term credit ratings have taken more account in the past. Long-term credit ratings predict the probability of default by the borrower at some point in the extended future.

Credit rating agencies generally assign ratings by letter to indicate ratings. Standard & Poor’s, for example, has a credit rating scale that ranges from AAA (excellent) to C and D. A debt instrument rated below BB is considered a speculative rating or an undesirable bond, what is significant is likely to build the dams.

Credit rating history

Moody’s issued publicly available credit ratings for bonds, in 1909, and other agencies followed suit in the decades after. These ratings didn’t have a profound effect on the market until 1936 when a new rule was passed that prohibited banks from investing in speculative bonds, or bonds with low credit ratings, to avoid the risk of default which could lead to financial losses.

This practice was quickly adopted by other companies and financial institutions and, soon enough, relying on credit ratings became the norm. The global credit rating industry is highly concentrated, with three agencies—Moody’s, Standard & Poor’s and Fitch—controlling nearly the entire market.

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