Question: What are sovereign ratings? Explain their importance for India’s economic growth.
Answer: Sovereign or Bond credit rating is a mechanism to represent credit worthiness of a bond floated by a corporate or the government. These ratings assess the likelihood the debt will be repaid to investors.
Impact of high ratings
- Reduced borrowing rates
Higher ratings mean that India’s debt servicing capability increases. This enables the country to raise loans at a lower rate from international markets.
- Increase in investments
Capital and liquidity into the market from offshore entities increase due to higher ratings. This will help in funding startups and newer ventures in the country.
- Stable economic growth
Higher sovereign ratings help investments to stay for a longer duration. This will ensure that growth rates remain stable over a longer period.
- Enable job creation
Better sovereign ratings enable greater investments. More investments usually improve economic activity and create employment in an economy.
Impact of lower ratings
- Higher spending on debts
If sovereign ratings are down, India will have to spend a larger amount in servicing debts. This will increase its deficit.
- Printing currency
In case the government is unable to raise loans in open market, it will be forced to print currency for financing the deficit. This usually brings high inflation.
- Economic contraction
In case sovereign ratings go down, the investment reduces significantly. Lower liquidity creates shortage of resources giving rise to economic contraction.
Thus, sovereign ratings are eagerly watched across the globe. Good ratings are always boosting for a country’s economic growth.