Credit Ratings

Example

Sovereign Credit Rating: In May 2025, Morningstar DBRS upgraded India’s sovereign credit rating to ‘BBB (Stable)’. This change was due to better fiscal management and economic reforms.

Implication: A ‘BBB’ rating means India is viewed as an investment-grade country. It can meet its financial commitments but is more vulnerable during tough times compared to higher-rated countries.

Key Components of Credit Rating

1. Payment History (35%): The timeliness of past repayments plays a crucial role in the rating.

2. Credit Utilisation (30%): This assesses the proportion of available credit that is used.

3. Credit History Duration (15%): The length of the credit record is factored into the rating.

4. Credit Mix (10%): A diversified credit account portfolio is more favourable.

5. New Credit (10%): Recent credit enquiries or newly opened accounts are considered.

6. Financial Performance: This includes profitability, debt levels, and liquidity.

7. Economic Conditions: Broader factors like inflation, GDP growth, and fiscal deficits impact the rating.

8. Market Trends: Industry performance and macroeconomic outlook also contribute to the rating.

Benefits in Investment Planning

1. Risk Assessment: Credit ratings provide investors with an independent evaluation of risk, helping them assess the safety of bonds and debt instruments.

2. Lower Borrowing Costs: Entities with high ratings can borrow at lower interest rates due to a lower perceived risk.

3. Market Access: Higher ratings make it easier for issuers to access capital markets.

4. Investor Confidence: Ratings offer credible and independent evaluations, fostering investor trust.

5. Portfolio Diversification: Ratings help investors select investments across various risk categories, facilitating diversification.

Challenges

1. Subjectivity: Credit ratings depend partly on subjective judgements, which may lead to bias in evaluations.
2. Transparency Issues: Rating methods are often not fully shared, raising transparency concerns.
3. Potential Bias: Developing countries might be underrated, even with strong economic fundamentals
4. Market Sensitivity: Credit ratings can be sensitive to economic or political shifts, leading to changes that impact investment value.

Conclusion

Credit rating is an essential tool in investment planning in India, as it helps assess the risk associated with investing in various bonds and debt instruments. It also influences borrowing costs for issuers. While credit ratings offer valuable benefits, such as fostering investor confidence and enabling informed decisions, challenges such as subjectivity and market sensitivity remain. As of 2025, India’s improved ‘BBB’ rating reflects growing economic strength but highlights the need for continued fiscal discipline and reform to maintain financial stability.