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Do Macroeconomic Indicators Explain India's Sovereign Ratings? An Empirical Analysis

Amaresh Samantaraya is Assistant Adviser in the Department of Banking Supervision, Reserve Bank of India, Mumbai; e-mail: asamantaraya{at}rbi.org.in

Jeanne Verrier

Jeanne Verrier is Research Assistant in the Research Department of the International Monetary Fund, Washington, D.C.; e-mail: jverrier{at}imf.org

Sovereign rating—an assessment of the relative likelihood of a country defaulting on its financial obligations—is important not only because better ratings facilitate external borrowing at favourable rates of interest, but also for the impetus it gives to the development of domestic financial markets in an emerging economy. Assessing the role of various macroeconomic factors influencing India's sovereign rating, our preliminary analysis indicated that while upgrading India's sovereign rating since 2003–04 both Standard and Poor's and Moody's apparently taken, high GDP growth, rising foreign reserves, declining fiscal deficit and rising exports into account, but the economic rational for downgrading the rating between 1998 and 2002 is not very convincing. The econometric analysis, using an ordered probit model, did not find strong statistical support for several relevant macroeconomic indicators in the determination of India's sovereign ratings. Could a major part of the explanation have come from some other sources, such as qualitative social and political considerations? India's relatively low sovereign ratings compared to its peers raises questions about rating agencies appropriately accounting for India's excellent economic performance in recent years; its formidable record of serving all external liabilities on time; and factors related to political stability and the social fabric of unity amidst diversity. Had these factors been taken into account appropriately, perhaps India's rating would have been better reflective of reality.

Key Words: Sovereign Ratings • Ordered Probit Model • JEL Classification: C25 • JEL Classification: G15

Margin: The Journal of Applied Economic Research, Vol. 3, No. 3, 193-221 (2009)
DOI: 10.1177/097380100900300301


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