MC EXCLUSIVE Moody’s may factor in India-Pak war into sovereign rating, unlikely to change methodology

Moody’s currently maintains India’s sovereign rating at 'Baa3', with a stable outlook, which is the lowest investment grade.

Moody’s Ratings might consider the recent India-Pakistan conflict in its assessment of India’s sovereign rating, a source from the global credit ratings agency told Moneycontrol on June 5.

The source said Moody’s has in the past downgraded ratings of many countries post the outbreak of war between Russia and Ukraine. "It is one of the parameters we consider in our assessment of a country’s sovereign ratings," the person added.

Moody’s currently maintains India’s sovereign rating at 'Baa3' with a stable outlook, which is the lowest investment grade.

Earlier in the day, executives from Moody’s Rating met senior officials from the Finance Ministry, including the Chief Economic Advisor V Anantha Nageswaran for a regular customary interaction. One senior source from the Finance Ministry said, “We wish the three CRAs (S&P Global, Fitch, Moody’s) to improve our ratings.”

The Finance Ministry officials have repeatedly spoken about the methodology used by the CRAs for granting sovereign ratings to India’s government bonds, and have sought a revision to it. In May, Finance Secretary Ajay Seth had said that the Indian government is holding discussions with CRAs, as it feels India’s sovereign rating doesn’t reflect the true state of the country’s economy.

“The CRAs assign 15% weight to ‘governance’ and they take this input from World Bank’s ‘Worldwide Governance Indicators’ (WGI), which needs restructuring,” Seth had said earlier, adding that the ministry is in touch with World Bank, and they are likely to change their methodology of ranking India in the WGI soon.

The Moody’s source, however, told Moneycontrol that they are unlikely to change their methodology of assessment. “We've a fixed parameter for credit ratings of sovereigns. Not sure, if we are flexible in changing our sovereign rating methodology,” the person added.

In December 2023, a Finance Ministry paper had said that the sovereign rating of India has ‘remained static’ at ‘BBB-’ during the last 15 years despite the country climbing from the 12th spot in 2008 to being the 5th largest economy in 2023. “This has serious implications for developing sovereigns’ access to capital markets and ability to borrow at affordable rates,” the paper authored by economists led by Chief Economic Adviser had said.

To be sure, S&P Global has maintained India’s sovereign rating unchanged since 2007. Similarly, Fitch has held its rating steady since 2007, and Moody’s since 2004.

The paper had said that while CRAs expect sovereigns to make improvements in the quality of their governance, reduce market risks, and improve the regulatory environment, the agencies themselves offer no insights or guidance on exactly what factors are part of their considerations and suggestions. “This opaqueness makes it difficult for any country to fully understand what reforms are needed to earn a credit rating upgrade," the paper had said.