Context:
India’s sovereign credit rating upgraded to ‘BBB’ with stable outlook by Morningstar DBRS
Sovereign Credit Rating:
- Assesses a country’s creditworthiness, indicating the risk level associated with lending to its government.
- Application: Applies to all government-issued bonds.
- Categories:
- Investment Grade: Low risk of default, financially stable.
- Speculative Grade: Higher likelihood of default, riskier investments.
- Major Agencies: Standard & Poor’s, Moody’s, and Fitch Ratings are the three most influential credit rating agencies.
- Issues with Credit Rating Agencies –
- Heavy Reliance on Qualitative Indicators – Methodologies often depend on the opinions of a small group of experts; Can lead to subjective judgments and bandwagon effects.
- Lack of Transparency – Operate as private entities without independent funding; May impact institutional quality, as measured by the World Bank’s Worldwide Governance Indicators (WGIs).
- Bias Against Developing Nations – Frequently overlook key economic factors such as GDP growth rate, inflation, and government debt.
Source: TOI
Previous Year Question
Consider the following statements:
1. In India, credit rating agencies are regulated by Reserve Bank of India.
2. The rating agency popularly known as ICRA is a public limited company.
3. Brickwork Ratings is an Indian credit rating agency.
Which of the statements given above are correct?
[UPSC Civil Services Exam – 2022 Prelims]
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (b)