SOVEREIGN RATINGS: DETERMINANTS AND POLICY IMPLICATIONS FOR INDIA

This paper studies the sovereign rating models used by the three principal rating agencies -- Moody’s, Standard & Poor’s  and Fitch -- to identify the important determinants of sovereign ratings. Ordered logit and ordered probit techniques are employed to check for the robustness of the empirical results. The period of study is from 2008 to 2012. We found that Moody’s model is more reliable as it has the highest rate of correct predictions for the sample countries. Further, the sovereign ratings are robust to the choice of estimation procedures. Economic strength, inflation and governance indicators are found to be important determinants of sovereign ratings, followed by fiscal strength, domestic political risk and size of the banking system. The key policy suggestions for India include taking steps for higher economic growth, removing infrastructure bottlenecks, controlling inflation, focussing on better governance, maintaining fiscal discipline, and better macro prudential risk supervision. The study is useful for policy makers, regulators, global investors and the academic community. It contributes to the international finance literature.