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India’s Sovereign Credit Rating Does Not Reflect Its Fundamentals, Says Economic Survey 2021

File photo of Union Finance Minister Nirmala Sitharaman.

File photo of Union Finance Minister Nirmala Sitharaman.

Tabled in the parliament on Friday, the survey called for an overhaul of sovereign rating methodology, saying that the fifth-largest economy can't be BBB- rated.

Economic Survey stated that India’s sovereign credit rating doesn’t reflect its fundamentals. Tabled in the parliament on Friday, the survey called for an overhaul of sovereign rating methodology, saying that the fifth-largest economy can't be BBB- rated.

“Never in the history of sovereign credit ratings has the 5th largest economy been rated as the lowest rung of investment-grade (BBB -). India’s fiscal policy must not remain beholden to a noisy, biased measure of India’s fundamentals. India’s forex reserves can cover an additional 2.8 standard deviation negative event. It is imperative that sovereign credit rating methodology be made more transparent, less subjective,” it said.

It added that China has also been railing against the methodology of international rating agencies, said their methodology is suited to developed economies, not emerging markets.

"There is a large academic literature that highlights bias and subjectivity in sovereign credit ratings, especially against countries with lower ratings," said the survey.

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 It called for larger engagements with Credit Rating Agencies for amending their methodology which captures the ability of the economies to pay their external obligations. The survey said that these "noisy, opaque, and biased" rating damage FPI flows into the country.

"While sovereign credit ratings do not reflect the Indian economy’s fundamentals, noisy, opaque, and biased credit rating damage FPI flows. Sovereign credit rating methodology must be amended to reflect economies’ ability and willingness to pay their debt obligations by becoming more transparent and less subjective," the survey noted.

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