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At the 4th International Conference on Financing for Development (FFD4) in Seville, India urged reforms in the sovereign credit rating system and multilateral development banks (MDBs) to ensure fair, inclusive, and sustainable financing for developing nations.

Key Terms and Concepts

Term	Meaning
Sovereign Credit Rating	An evaluation of a country’s creditworthiness and risk of default
Credit Rating Agencies (CRAs)	Institutions like S&P, Moody’s, Fitch that assess sovereign and corporate creditworthiness
Investment Grade	Credit rating from AAA to BBB-/Baa3, considered safe for investment
MDBs	International institutions that provide financial assistance to foster development (e.g., World Bank, ADB)
Pro-cyclicality	Tendency to downgrade ratings during downturns, worsening the crisis

What is the Sovereign Credit Rating System?

Feature	Details
Purpose	Indicates the risk level of investing in a country’s debt
Use	Helps in FDI inflow and accessing external borrowing markets
Big Three Agencies	S&P, Moody’s, Fitch – all US-based
Rating Scale	AAA (best) to D (default); BBB-/Baa3 is lowest investment grade
Parameters	GDP growth, debt, fiscal deficit, inflation, forex reserves, political stability

India’s Current Rating

Agency	Rating
Moody’s	Baa3
S&P	BBB-
Fitch	BBB-

India maintains these are undervalued, given its position as the 5th largest economy, strong forex reserves, and consistent growth.

Why India Demands Reform

Issue	Explanation
Developed Country Bias	Countries with worse indicators (like Italy) have higher ratings than India
Debt Misjudgment	India’s largely domestic debt treated like risky foreign debt
Ignoring Strong Metrics	Reforms like GST, IBC, and digital governance underweighted
Pro-Cyclical Downgrades	Lowered ratings during COVID-19 despite policy measures
Conflict of Interest	Agencies are paid by the entities they rate
Lack of Transparency	Methodologies are opaque and inconsistent
Missed Crises	Failure to predict 2008 crisis weakened their credibility

Reforms Proposed by India

Reform Area	Measures Suggested
Transparency	Disclose weightage of parameters, allow audits
Data-Driven Ratings	Use AI, Big Data, dynamic indicators like GST, UPI
Global South Alternatives	Promote CRAs from India, BRICS, G20
Oversight	Global supervisory body under IMF or G20
New Metrics	Include climate resilience, digital governance, policy reform
Peer Comparability	Real-time updates, regional dashboards to ensure fairness

Sovereign Credit Rating in India

Agency	Notes
CRISIL, ICRA, CARE, SMERA, Brickwork, Fitch India	Governed by SEBI CRA Regulations, 1999
CareEdge	First Indian CRA to enter global sovereign rating space

In a nutshell

Memory Code: R-A-T-I-N-G-S

Real-time updates
Anti-bias measures
Transparency in metrics
Inclusive of reforms
New global CRAs
Governance audit
Sustainability metrics

Prelims Questions

1. Which of the following agencies is part of the “Big Three” global credit rating agencies?
   a) ICRA
   b) S&P
   c) CRISIL
   d) Brickwork
   
2. What does the term “investment grade” indicate in sovereign credit ratings?
   a) High default risk
   b) Ratings below BB
   c) Safe and low-risk credit rating
   d) Based on perception alone
   
3. Which of the following is not typically used in sovereign credit rating assessments?
   a) Foreign reserves
   b) Debt-to-GDP ratio
   c) Literacy rate
   d) Political stability
   

Mains Questions

1. Critically analyze the role of sovereign credit rating agencies in global finance and examine the need for reform from the perspective of emerging economies like India. (GS3 – Economy)
2. Discuss the limitations of the current credit rating system and suggest measures to make it more inclusive and transparent. (GS2/GS3 – International Institutions/Economic Development)

Answer Key Table

Q.No	Answer	Explanation
1	b	S&P is one of the Big Three; the others are Moody’s and Fitch
2	c	Investment grade ratings denote low credit risk (AAA to BBB-)
3	c	Literacy rate is not a direct factor in sovereign credit assessments