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Ratings That Don’t Matter 💯

You’ve probably heard about America’s rating downgrade from AAA to AA+, last week. But did you know this isn’t the first time this is happening?

Back in 2011, S&P was the first major rating agency to downgrade the US to AA+. The US markets lost nearly 7% on that day, and that became known as Black Monday.

This time around, one of the three major rating agencies, Fitch downgraded US debt because of political stand-offs associated with debt limits, and last-minute resolutions. However, the reaction was relatively mellow, with the markets falling by about 2%.

Why does it matter?: Like for the regular population, lower credit ratings can result in a rise in a country’s borrowing costs. And a downgrade can make US debt appear riskier. Remember, the US has been considered perfect when it comes to repaying its debt. That’s why US debt is looked at as a safe haven. In the most turbulent times, investors across the globe flock to buying US debt.

But will it matter?: Each time the US has come close to its debt ceiling, which is 78 times since 1960, the US has managed to either suspend the ceiling, surpass the limit, or just raise the limit. But it has never failed to make interest payments. So, debt drama doesn’t necessarily mean less creditworthiness.

It’s different this time: Additionally, the backdrop of the two downgrades has been very different. Back in 2011, the US had just come off the mortgage crisis, and Europe was in a debt crisis. Problems then were much larger than now, where high inflation is being controlled by the steepest and fastest rate hike ever, that too without tipping the economy into a recession. The Fitch downgrade essentially has come at a much better time, making the markets worry lesser.

Whereas in India: Indian headlines have been stormed by Morgan Stanley upgrading India to overweight, citing the now-usual reasons - reforms, macro-stability, strong capex and profit outlook, and trends that support FDI and FPI flows. Morgan Stanley bumped India to the number one position in its emerging list.

Does it matter?: Not really. Well, it does make the narrative stronger, fetches more eyeballs, makes others reconsider their stance on India, and even instils confidence in investors. But that doesn’t directly translate into more money coming into India.

What matters then? What really makes the difference is the weight India gets in the MSCI indices, which global portfolio managers benchmark themselves against. On the MSCI EM index, India’s weight is ~14%, which has been steady for the last year, but has come up dramatically from ~8% back in 2020. If this gets revised upwards again, more money will flow into the markets - now that’s the upgrade you want.

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