What are credit ratings and how are they given?

What is a credit rating?

  • A credit rating is an assessment of the creditworthiness of a borrower. Individuals, corporations and governments are assigned credit ratings — whoever wants to borrow money. Individuals are given ‘credit scores’, while corporations and governments receive ‘credit ratings’.

Why do countries get credit ratings?

  • National governments, not countries, are assigned credit ratings by agencies like Standard & Poor’s, Moody’s and Fitch. Governments require ratings to borrow money. They are also given ratings on their worth as investment destinations. A country requests a credit rating agency to evaluate its economic and political environment and arrive at a rating. This is done to position itself as a destination for foreign direct investment.

What factors decide these ratings?

  • There are several criteria behind rating a government’s creditworthiness. Among them are political risk, taxation, currency value and labour laws. Another is sovereign risk where a country’s central bank can change its foreign exchange regulations. These risks are taken into account and ratings assigned accordingly.

Where does India stand now?

  • For the first time in 14 years, Moody’s has upgraded India’s rating to Baa2, a term that means that they consider the economy stable. Standard & Poor’s and Fitch too have a ‘stable’ rating for the country — BBB+ and BBB-, respectively.


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