MBA Aspirants are expected to know on what is new in economy and what is that impacting it? One of the critical factor for understanding is rating given by Moody’s. Read on: What are Moody's ratings and how do they impact our economy?
Moody’s Corporation is the parent company of Moody’s Investors Service and Moody’s Analytics. Moody’s Corporation provides credit ratings, which are popularly known as Moody’s ratings.
Moody’s ratings provide investors with a grading system and enable them to understand the creditworthiness of securities. It is important to understand the gradations of creditworthiness before jumping into the impact of Moody’s ratings on our economy.
There are nine Moody’s rating symbols – Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. In addition, Moody’s appends numerical modifiers 1, 2, and 3, to this rating classification from Aa to Caa.
Obligations rated ‘Aaa’ are said to be of the highest quality, subject to lowest level of credit risk, whereas obligations rated ‘C’ are considered the lowest and are typically in default, with little prospect for the recovery of the principal amount and interest. Sometimes, either no rating is assigned or a rating gets withdrawn.
These instances occur when the issuer belongs to a group of securities or entities that are not rated as a matter of policy. The credit rating and quality of issuers and their obligations are not constant; in fact, they keep fluctuating, which is why investors should keep close watch of the variations of credit rating before making decisions.
Moody’s India sovereign rating is Baa3, which takes into account the bleeding rupee, weak economic growth of the country, and the twin deficits. Moody’s is the first rating agency to retain the sovereign rating of Baa3, even after the Indian currency dived below 65 to the US dollar.
In fact, Moody’s is the only rating agency that has a stable outlook on the Indian currency while other rating agencies have declared a BBB- rating with a negative outlook.
Moody’s ratings are a reflection of India’s macroeconomic conditions and domestic economic challenges. In addition, it conveys to investors and the rest of the world that India has a high current account deficit and lower capital flows.
Since investors depend heavily on Moody’s ratings before making a decision on investments and capital flows, it is important to maintain a high ranking to gain points on creditworthiness. Investors are always looking for markets with low credit risk.
So, those with good Moody’s ratings will attract more investments and this will ultimately boost economic growth of a country. This once again has a ripple effect on the development of the country, value of the currency and the current account deficit.
Moody’s rating definitely has an impact on the economy and a higher Moody’s rating for a market is sure to enhance its economic standing. Currently, Moody’s optimistic rating of Baa3 is helping to maintain and stabilize confidence of investors, given the market stress that India is facing. Moody’s rating is seen as a reassurance, helps to alleviate investors’ concerns and in turn boost economic growth.
Once Moody’s demotes an economy and gives a lower credit rating, the Indian government will have to pay more interest on its debt to attract lenders. Increased costs to service national debt will ripple through the entire economy. As such, credit card purchases, mortgage rates, and consumer and commercial loans will require increased interest.
Higher interest rate is a disincentive to invest in a down-trending stock market, which is why Moody’s ratings are important for the health of the economy.