Ratings puzzle

Standard and Poor’s said that it is unlikely to raise India’s sovereign credit rating in the next two years. This has not gone down well with the Indian government, given the gradual improvement in the country’s economic fundamentals.

The implicit message in the analysis by the rating agency is that monetary policy has been more credible than fiscal policy. The inflation target for March 2017 will be met. There are doubts about the government’s ability to cut subsidies, improve public finances and reduce the burden of public debt. The potential costs of a bank bailout also loom on the horizon. Yet, it is quite likely that the financial markets will respond to ongoing economic changes before the credit rating agencies do.

The biggest puzzle in Standard and Poor’s statement is why low per capita income is being seen as an obstacle to a higher credit rating. This will only confirm the fears of many emerging market economies that ratings are in some way linked to economic power.

ALSO READ | S&P’s credit rating for India unchanged, outlook stable