What is credit rating all about?
A credit rating evaluates the creditworthiness of a borrower. Corporations and governments issue bonds to borrow money.
What does it mean in as it relates to bonds?
When you buy a bond, you are lending your money to someone - the government or a private company that promises to repay it within a specified tenure. Credit ratings, as explained earlier, represent the ability of the bond issuer to repay. A higher rating implies that the bond issuer has lower likelihood of defaulting on payments.
How is it calculated?
There are no specific mathematical formulae. Agencies use public available information, historical trends, discussions with government officials and future outlook to determine credit ratings.
What is the rating scale?
The rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC or D. Anything lower than a BBB- rating is considered risky.
Who calculates credit rating?
Moody's, Standard & Poor's (S&P) and Fitch Ratings are among the ones which operate worldwide. In India, commercial credit rating agencies include Crisil, CARE and Icra, among others.
Whom does credit rating benefit?
It is used by individuals and entities that purchase bonds issued by companies and governments to determine whether the borrower will repay as promised.
What is a junk bond?
Bonds that have very low credit rating are known as junk bonds because of a stronger likelihood of default.
What have credit rating agencies said about India's sovereign ratings?
A falling rupee has also raised the spectre of a downgrade of India's sovereign rating by international credit agencies that have unsparing in their criticism about India's precarious public finances and widening current account deficit (CAD).
The prospect of a credit rating downgrade to "junk" also cast a very long shadow over the market with S&P stating that that the chances of a downward revision of sovereign rating was higher for India than Indonesia. S&P has maintained India's sovereign rating at "BBB-", which is one notch above "junk", carries a higher risk of default.
Why are credit ratings agencies so bearish in their outlook on the Indian economy?
The agencies are of the view that widening current account deficit or the gap between imports and exports is worrisome. This will reduce the government's elbow room to borrow and spend its way out of a crisis.
Besides, "political gridlock" is delaying attempts to reduce a mounting subsidy bill on fuel and fertilisers. According to some agencies, the Food Security Bill could worsen India's fiscal deficit problems.
Should I be worried?
If you have a regular day job — teacher, manager, doctor, and so on — you may have to worry about a possible downgrade of India's sovereign ratings. A weakening economy could prompt companies to defer capacity expansion plans, cut hiring and reduce job prospects.
A downgrade could have an adverse bearing on India's currency and equity markets. A ratings cut could be interpreted by foreign funds as a sign of a weakening economy, which may prompt them to pull out of Indian markets. The resultant demand for dollars could further hit the rupee, which fell by more than 20% since April.