The Hindu Explains: What are credit ratings and how are they given?

India’s credit rating has been upgraded by Moody’s, a global rating agency. But, what do these ratings mean, and what are they based on?

Men walk past the headquarters of Fitch Ratings in New York.

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.