Standard and Poor’s, a premier rating agency, said this week that India could lose its investment grade rating or see a
downgrade in its sovereign rating.
What is sovereigh rating
A sovereign rating basically reflects the risk of investing in a country, with AAA being the highest and D being the lowest. There are various kinds of rating: short term, long term, local currency, foreign currency and so on.
What is downgrade?
A credit rating downgrade means that the risk of investing in the country has gone up. A downgrade could be a consequence of political instability, economic instability, rise in external risk or all of them together. A downgrade normally results in higher cost of borrowing, both for the government and companies, as investors would ask for a higher premium for investing in the country.
How would S&P downgrade affect India
If downgrade happens, it would push long-term Indian bonds to the speculative grade from the current state, which is the lowest in the investment grade (BBB-). S&P has raised concerns about slowing growth and the government’s inability to move forward with economic reforms. In its statement, the agency said: “Setbacks or reversals in India’s path towards a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality.”
It will become difficult for companies to raise capital in the overseas market. The cost of capital for the country will go up, which will affect growth. There could be problems on the currency front, too.