The Hindu Business Line : `India merits higher rating'

THE Reserve Bank of India has observed credit rating agencies that play an important role in accessing commercial borrowings abroad don't always take into account factors which indicate financial crisis and default.

While sovereign credit ratings have been found to be significantly linked to economic fundamentals, studies indicate rating agencies have attached little importance to the indicators of liquidity, currency misalignment and assets price behaviours, all of which have close links with financial crisis and default, according to RBI's report on Currency and Finance 2002-03.

"There is evidence that such ratings generally fail to anticipate banking crisis and even their predictive power regarding currency crisis is limited. Sovereign ratings, especially for emerging market economies, are reactive rather than anticipative of economic events," said the report.

Notwithstanding the generally subdued perception of international credit rating agencies regarding the Indian economy, Indian corporates have been able to mobilise funds in the international capital market at rates, which are generally more favourable than those accessed by corporates from many other developing countries with similar credit ratings.

The report has observed that this may have been due to the more favourable perception of investors about the Indian economy as compared to that of the credit rating agencies, as well as India's unblemished record in honouring external obligations.

"Even on the basis of factors and weights used by credit rating agencies, there are indications that India should have been assigned credit rating one or two notches above what has been actually assigned in recent years," the report has said.

Highlighting the measures undertaken for the management of capital inflows, the report observes while sterilisation operations have been the principal instrument of managing capital flows in India, unsterilised intervention in foreign exchange markets could lead to an alignment of domestic interest rates with international interest rates which could have beneficial effects on investment and growth.

In the short run, unsterilised intervention could lead to asset price volatility, imprudent lending and adverse selection which could have inimical effects on the real economy with possibilities of capital flow reversals. "It must be stressed, that sterilisation is essentially a means of buying time since in the ultimate analysis, only durable and consistent policies enhance a country's capacity to absorb capital flows," the report said.

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