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Podcast #28: Why credit rating agencies are irrelevant and deserve a downgrade



“There’s an internal class system they have developed. Whether it is between companies or across countries. The developed countries get a different framework to work with and what they call the non-developed is held to a different standard.”

On today’s show, Shray asks Deepak about the recent downgrade of India by Moody’s. Should we care? Are rating agencies more or less relevant after the 2008 debacle and what does the downgrade mean for India.


Shray Chandra: Hi Everyone and welcome to Episode 28 of the Capitalmind Podcast. A few of us have trickled back into the office and for now life is coming back to normal in Bangalore – at least for the time being.

It’s been a month since our last podcast and when you look around – the real economy still looks like it’s in terrible pain. There are distressing news updates and images everyday.

The stock market on the other hand has regained some ground. We closed above 10,000 on the Nifty for a few days in a row. Rumors have it that some of that FII money that caused the crash in the first place has started coming back.

On the macroeconomic side, there was a big news item a couple of weeks ago with a 20 lakh crore economic package – now nearly everyone says isn’t remotely close to 20 lakh crores.

In spite of this or because of this, Moody’s has downgraded India’s foreign currency debt to Baa3 which is apparently the lowest investment grade possible. In doing so it (Moody’s) has joined S&P and Fitch which already rated us at this low level anyway.

Now, Deepak you’re not very impressed with Moody’s and when they upgraded us back in 2017 you were fairly disdainful. You’re now equally disdainful. Can you tell me what’s going on here? Have you not forgiven these agencies for their mistakes in 2008 or is there something more to it?

Deepak Shenoy: Well, you know Shray, it’s been an interesting 12 years since the rating agencies which were so wrong in 2008, they are continuing to be wrong [now] and we suddenly give them a lot more power than they should have. Despite them having been wrong for so long.

While we’ve had people like Ratings Agencies tell us they liked or did not like something, there is a tremendous amount of power we’ve given them although they are just a source of [an] opinion. They’ve told us that India should be rated Baa3 or whatever the label is. But that really tells the world what an agency thinks of India. If it stopped there it would be ok because a lot of people tell the world what they think of India and we don’t necessarily care. Sometimes they are right and sometimes they are wrong. We actually think of it as an opinion [and therefore let it be].

Go on Prime Time TV you will find 20 anchors and they will have 20 different opinions. Each one has an opinion and that’s what it is and someone can say in the lockdown we’re going to have 600K cases. Another person will say 100k cases. One of them will turn out to be right. You take the same opinions 6 days later, you find the person who was right the first time is wrong the second time etc. But we don’t find this to be a problem. [That’s the role we want or expect them to play]

Rating agencies should be one of those. Except in this case their opinion – we consider it to be more informed. My disdain for them comes from the fact that they don’t do things the way they are supposed to or are required to. For instance, they don’t downgrade on time. They keep their ratings too high for too long.

As an example, the earliest I can think of is in 2001 when Enron was downgraded literally three days before it went bankrupt. The whole world knew Enron was in trouble but the rating agencies didn’t downgrade them till it was essentially declaring bankruptcy and everyone knew the end was near. But the other point, companies or countries that are good – they don’t give them [the rating they deserve] because of an artificial framework that pushes them lower down for no fault of the company’s/country’s.

So they don’t downgrade bad players whose ratings are historically high and don’t upgrade the good players who have a depressed rating. Today India is rated worse than Spain. Spain has a much higher debt to gdp (nearly 100%) and it’s probably going to get much higher after the crisis. India’s debt to gdp is officially 60-65% and if you add more stuff [that’s like quasi debt] it’s like 70%-75%. India isn’t anywhere close to these 99% of GDP levels like Spain.

Spain’s fiscal deficit was at 10% in 2012. It was at 10% in 2008. It’s reduced [the deficit] over time. India has been 3.5% – 4% in the last 7-8-10 years. And we’ve brought these deficits down. Now it’s going to increase but so is everyone else. Spain has been consistently rated higher than India. It has seen more bank failures than India has. It has seen more issues with unemployment. It has other issues – political and economic and yet the rating agencies keep their ratings high. Why?

If you think of emerging market countries like India, Russia, Brazil and so on. Look at the developed economies of which Spain is one. They do not get the same treatment as developing countries. If you look at any of these parameters, India scores better but India gets a horrible rating. A lot of other countries get much higher ratings. We’re a young nation with a lot of other things in our favor. But there’s no standardization. If you took the same parameters and measured two countries you would say India needs to be rated higher or those countries need to be rated lower. Since there’s no standardization – your opinion [is one] without proper data.

You wear suits without rating agencies but you don’t come across as very intelligent because when……..we were last upgraded we were still rated lower than Portugal. They were in the throes of pain and India was not [at that time] and yet even after the upgrade we were a few notches lower. I don’t think you should give them the kind of importance that we do.

S: You clearly don’t like them. But let’s get to that “importance part”. Who gives them this importance. Was it just a slow news day and everyone was just talking about it. Is there someone who actually listens to this and is OMG I need to do something about my Indian debt. As you said they can give an opinion, so who is giving them the importance that seems to be bothering you?

D: If they were only an opinion I wouldn’t have cared. Perhaps I still shouldn’t. The problem really is that their rating actually carries some weightage in the economic world. What is that weightage? Now people have decided that ratings agencies are good at rating companies or countries. That reason may be unfounded but the concept remains that these folks can rate companies.

Now the regulators and the companies of the world have decided that when they rate countries at a certain level, they should be given some higher degree of importance. A bank lending to a company which has a AAA rating has less capital requirements. If I lend Rs 100 cr to a AA company I will need to make provisions for say 0.75% i.e, 75 lakhs of my capital is now stuck because I’ve given a loan to AA company. But if I gave a loan to a company rated AAA – I would only have to set aside say 50 lakhs.

Now I have only a limited amount of capital (say 10 cr) – I could lend to either 20 companies which are AAA or only 12 AA companies and possibly only 3-4 companies that are A or BBB rated. You look at your capital and say listen I’ll put a lot of my money to higher rated companies not because they are better companies but because they are rated highly. Although I know that these companies may not be great companies because credit rating agencies have been wrong so often, I will still actually have to allocate my money in that way so you incentivize to buy investment grade vs. speculative grade debt. Because of this they get a higher legal sanction than just an opinion.

Take an example. Why do you not like Franklin today? You say Franklin mutual funds have gone and done bad things. The companies that people are worried about are actually the higher rated ones. Franklin isn’t [just] hated today because it invested in BB rated debt instead of AA or AAA debt. The ones that have defaulted in the recent past that have made news – IL&FS was rated AAA one month before it defaulted. DHFL was rated AAA almost all the way until it defaulted. So AAA has almost nothing to do with the default risk. Whereas the concept of rating is supposed to say increased or decreased risk of default. If I can’t trust your rating to protect me in case of a default then you fail when I need you the most. So from a regulatory perspective, we are rewarding people who invest in companies/countries that are rated AAA.

If we as a country slip one more notch in the opinion of say Moody’s – then we fall into speculative grade. In speculative grade, a lot of pension funds may say – listen we’re not allowed to invest in speculative grade bonds because our mandate says only Investment Grade. Then you have to pull out of India. You now have a second layer of importance because some people have decided that rating agencies are good.

There’s another point about loan covenants but I’ll come to that at a later point. The fear right now and I think a lot of people are expressing this – if we are rated so low will Pension Funds not invest in Indian debt? That’s the question that they are asking.

S: This is surprising to me. Do Pension funds even care about Indian debt? We just did a podcast a couple of weeks ago where you talked about how we just make it very difficult and aren’t happy with foreigners owning a lot of our debt. So is this a problem? It’s only the foreign currency debt that’s been downgraded, if no one cares – then why do we care?

D: It’s amazing because the amount of action foreign investors have in the equity markets – they are very big players, there are almost non-entities when it comes to debt in India. The debt markets in India – they can’t even buy Indian debt without having certain limits to how much they can own. Those limits have increased recently but there those limits are so tiny that you will almost get shocked. Let me give you an example.

We have about 60 lakh crores of central government debt in Rupees that means USD 800 billion – central government bonds outstanding are USD 800 billion.

Then if foreigners really wanted to buy our debt the maximum they can buy is 2.34 lakh crores which is roughly 30 billion USD. Less than 4%.

So less than 4% of all government long term debt can be bought by foreigners. They currently own less than half of their allowance. They haven’t used their limits. They own about 1.2 lakh crores which is roughly 12-13 billion dollars of debt. To give you an example of size, the US BND ETF is 54 billion USD. The total amount of [Indian goverment] debt that is owned by all foreigners put together is less than 1/4th (nearly 1/5th) of the BND ETF – a single ETF in the US. There are others like LQD 49 billion USD, TLT 18 billion (20+ year treasuries). There’s more in that one fund than all foreigners in Indian debt.

The problem right now is if they took out all of this money, 100,000 crores/1 lakh crores – that’s a few weeks of issuance. Really that is so tiny that literally any of the banks could buy that and sit on it and it wouldn’t even figure in the scheme of things. FIIs play such a small role in our debt markets. The fear that a credit downgrade will make them run away is so unfounded that it’s laughable. But also we have to look at the fact that they have never been interested and aren’t interested in Indian debt in any meaningful way.

S: Is this because Indian debt is just unattractive or have we managed to create enough hoops that they just don’t find it worth it.

D: A bit of both. Here’s where the hoops part is. We definitely create hoops. They used to have to bid earlier – to buy your debt I have to buy a ticket that allows me to buy your debt. And I’m going to pay for the ticket first and then I’m going to pay for your debt. We’ve removed that approach but there are still limits. There’s an overall limit of 2.34 lakh corres. But within that there are sub limits – you can only buy for more than 3 years maturity, then you can buy less than 10% as long as 90% is more than 3 years maturity. And what happens if something that is 3 years yesterday becomes 2 years and 364 days today – you can’t sell that to another FII.

All these rules/hoops have actually designed a maze that could figure in a Harry Potter movie or book. We make it difficult and they indeed struggle to buy out debt.

For historical reasons we don’t like to borrow from foreigners as a government. Foreign debt itself is mostly denominated in rupees and not dollars……The total sovereign debt itself has come down in the past 1 year by roughly 10%.

We have Forex reserves of 450 billion USD so it’s not even like the dollar part of this debt (maybe 45-50 billion) is less than 10% of the total forex reserves we have. So it’s not even like we’re stretched to cover it.

What Moody’s has downgraded is sovereign rupee based debt and sovereign dollar based debt. Dollar based debt is so small it’s insignificant. Rupee based debt – I don’t even understand why because Rupee is Indian, we can print it by the RBI to pay if there is a problem. There have been sovereign defaults by other countries. But if you’re worried that India will default, or more worried than yesterday, why would you worry about our Rupee debt? We’ll always print Rupees.

The argument is that there have been 8 countries that have defaulted in their own currencies. Two of them were Venezuela and Ecuador. Both of which at those times pegged their currencies to the US dollar so you can’t print it because you’ve pegged it you had to default. You had a problem with Jamaica and they said we can’t pay back and we’ll convert you to a longer term security and whoever takes the swap that was fine. Despite the fact that everybody did take the swap it is considered a default.

Ukraine and Russia – Russia was a serious problem but what Russia did was not to say I won’t pay you back your money – they paid everybody back after 5 years. They put the money into a special account, that account was allowed to stay around in roubles, the rouble depreciated a lot but what they allowed that money to do is to go and buy ruble denominated stocks in the russian stock market. Almost everyone took that option and made out like bandits in 5 years. By 2003, when people were able to get out of that Russian default. It’s not even like when countries default in their own currencies there was a loss of significance to any of the players that were involved.

India has never defaulted. India has never defaulted on rupee debt by the government. The time that we had a problem was about the dollar borrowings and not the rupee borrowings. And the fact – all these factors put together should say listen give this country a higher rating for their rupee debt. Why are you giving them a Baa3 on the Rupee debt? The answer is it’s not uniform the way they look at India vs the way they look at Europe vs Japan or the US.

Think about the fact that our Current Account Deficit (CAD) is now the lowest ever. If you think about foreigners coming in and saying listen we’ll give India money and we’ll never be able to take it out. One of the reasons why the INR depreciates is because the CAD is very high. The CAD is not – here’s a structural difference. India’s Current Account consists of Imports and Exports. Remittances and stuff. So what we do when we import an export, stuff we import is merchandise. Part of that merchandise is something called non-monetary gold. We import gold. It’s one of our largest imports – probably 2nd or 3rd largest. And we export refined oil and services and computer technology services. And we also of course get remittances from Indian workers abroad.

All of this, if you add up, and remove the gold – we are actually in a current account surplus. So what is gold and why is gold special? Now gold is actually a capital asset and people don’t buy to “use” it. They buy to save it and store it as a store of value. It’s a capital asset. But worldwide other countries have decided that gold is a current asset not a capital asset. So any import of gold should be considered in the current account. So if you remove gold, India has the right if we were allowed to export gold and we’re not allowed to because of an archaic British era rule. This factor means that gold can only be imported and if you take that out the CAD is positive.

So if your CAD is positive that means the hit on your currency is not major. If you change the way gold is accounted for, India is actually current account positive. So if that’s the case then are we really worried about a CAD in India? I don’t think we should be. Here’s another thing. People tell you, government accounts are in bad shape. Who isn’t in bad shape? Britain? If you look at their numbers you’ll come back with a greater appreciation for India.

India’s total money supply is less than GDP. China’s is probably 3-4x GDP. America is 1.5x GDP. If you have a country whose money supply in entirely is less than GDP – it’s debt cannot be greater than GDP by almost by definition.

But there is basically the point that India’s central government debt is relatively much smaller percentage of GDP than it used to be. Even if I were to say 12 lakh crores is required – there is absolutely no reason to worry because 12 lakh crores would add only another 4-5% of GDP temporarily and then the government would get back into shape. Most of the countries are talking about 20% of GDP being lost in the lockdown and covid related disasters.

Here’s the other thing. We announced a 20 lakh crore stimulus package. But hardly any of that money is going out today. In fact nearly nothing is going out today. There’s no stimulus package of any meaningful sort. But all we’ve stimulated is the media trying to figure out where this 20 lakh crore rupees is going to be spent because it’s not – it’s only [various] guarantees and I will return your tax that I owe you anyway. So why are we downgraded?

You’ve got a country like that – you also have a parallel economy in cash that we never liked and it’s helped us in times like this because this informal economy provides the lowest level credit that is required to get economies back into shape. That is a well oiled system. People borrow from chit funds, that money is used to buy goods and services from an informal vendor. Those goods and services form a reasonable part of the lower end backbone of this country. You’ve got that which doesn’t exist in any meaningful form abroad – so the government there has to stimulate as much. Here you’ve got a private sector that can do it. If you’re downgrading – why are we more likely to default compared to what? Spain? France? Italy? Look at their books. I would say they are in much worse shape than India. And if India is to recover, they will require a lot of spending by the government and India will require a lot less almost by definition because India does better on its own – it always has and the government has never really spent all that much.

The reasons they tell you – don’t compare to the US, it’s a reserve country. Don’t compare to Spain – have you seen the kind of development Spain has? My answer is you’ll always have a reason right? You can always shift goal posts and tell me that you can’t compare against this. Tomorrow you’ll tell me I can’t even compare against Bangladesh since it’s a smaller country.

The point about these opinions is that if I don’t like your opinion on TV I will switch the channel and move somewhere else. In a ratings agency, I am forced to look at your opinion because my regulators tell me that your opinion matters. My point is take that away and your opinion becomes another tv channel which I can switch off or cut the cord – not because I don’t like what you are saying but because I believe you’re wrong. And I can continue to believe that.

S: You shared a funny anecdote that just a year ago Airtel was downgraded and after that pretty good movement in both its debt and its equity. You’re almost saying that some market participants take these rating agencies like reverse signal or contra-indicators.

D: Airtel got downgrade on like Feb 6 2019 and if you look at its bonds it’s done phenomenally, it’s stock price has also doubled from that time. But it’s bond price has also significantly gone up. You’d have made 14-15% on the debt.

If I had invested in other EM bonds, I would have done better – that’s not relevant right? If somebody downgrades then people should be selling. But they were not and they were buying more of it and they’re buying a significant amount.

Here is where it gets interesting. Because rating agencies act so late, by the time they’ve actually downgraded, the company might be in much better shape. It’s also possible that the company goes down completely – but the market determines that. Enron was going down 1.5 months before it was downgraded because market participants knew and said forget the rating agencies.

What happened in 2008? The rating agencies would highlight a set of bonds and say these are AAA, except when the market participants realized that what underlies this is a lot of crap – they automatically repriced the securities downwards. The price in the market had already started to go down a long time before the ratings agencies started their downgrades. So it’s almost like a contra indicator in a way that says by the time the rating agency has got to it – either it’s time for it to recover or it’s already been dead.

India’s past downgrades have results in stock markets going up almost every single time. So maybe we should view this as a bullish event.

S: I’d like to dig into those. As you just said, sometimes they’re biased because the person paying them was rating shopping and so they had to stretch themselves to get the right rating or in some cases you just said they’re late and it’s almost because they don’t want to say what everyone else already knows because they’re scared it will make things worse. Could you dig into what are the problems these rating agencies really face. Whoever you create in its place. Surely they’ll also have these same problems?

D: I’ll start with the first part. What are the incentives? If you look at rating agencies – who pays them? First they are paid by the companies themselves. Country rating agencies are not paid by anybody.

Let’s say I am Enron, I am the one that is paying you to rate me. So if you don’t rate me high enough, I will go to somebody else. So there is rating shopping.

S: There is that tension and it’s been highlighted [in media, news, movies etc before].

D: Since you don’t want to lose my revenue, you’ll rate me highly on an excel sheet that I as an MBA have made. You don’t find any reason to refuse me that because the logic seems sound.

The second part is something called loan covenants that I talked about earlier. So let’s say I’ve taken a loan from you and you’ve given me Rs 100 crores. But you’ve said as long as the rating is AAA the interest rate is 6%. If your rating falls to AA I am going to charge you 8%. If your rating falls to A – I’m going to charge you 10%. Let’s say there’s a rating agency that’s looking at me (as the company). It’s saying this company is going to struggle to pay back its interest or its principal. It downgrades me to AA. If I couldn’t pay me interest at 6% – what are the chances I’ll be able to pay it at 8%. Low. So I’ll be downgraded another notch to A. Suddenly your action to rate me has made me worse than I was.

In a way this reminds me of the idea of the Heisenberg Uncertainty Principle. The action of observing something changes it. The fact is the action that you took in order to rate me has now affected my viability in the first place. So it’s a downward spiral.

If rating agencies know this, think of yourself as a rating agency. If I downgrade Deepak – he will go bankrupt. It’s not that I’m downgrading Deepak from AAA to AA, the minute I do the first downgrade I might as well downgrade him to default because he’s going to go there. So knowing that you will delay your downgrade as much as possible because you want to keep anyone from calling their loans or exercising loan covenants that hurt me.

S: This is an unusual set of constraints these folks operate under. Maybe this is wherever you’re going with the “it’s not appropriate to give them to legal sanction”, they are still subject to market pressures like price shopping and they have this added responsibility that when things are looking bad, they need to hold back – everytime it matters you can’t use them!

D: The weird thing is the regulatory sanction is what has hurt these companies. If they were non regulated. This is my alternative solution – we’re saying ok let’s look at the lockdown. Somebody dictated to us that we can’t go to a shop between 7pm and 7am. Now this is ok during a lockdown. But what if someone told you this in normal times and you look at them and say – listen I want to go to a shop at 9pm – why are you stopping me?

If my answer is what are you shopping for at 9pm and why can’t you do it before 7pm? I can ask you that question, you look at me say free country. I want to be able to do it whenever I want. So if it’s normal times, I want to shop when I want.

You’ve determined that beyond 11:30pm the shops don’t want to be open or there’s a limit to which policeman can work and I’m ok with say 11:30 but I’m not ok with a 7pm to 7am permanent curfew. Because you want the freedom to think – you don’t want somebody else to ask you why aren’t you doing this before 7pm.

Why can’t we do the same thing with my money? Who is the rating agency to tell me where I should put my money or where I should not? Indirectly they are dictating where my money can go.

Why can’t I be intelligent enough and why am I going on their shoulder and saying I thought I trusted these rating agencies but the buggers gave me a AAA and now look it’s defaulted. I shouldn’t be allowed to say that as a person who is managing money.

Who gives you the freedom to say – I depended on this rating agency so therefore its the rating agencies problems. That won’t fly.

My point is take away the rating agencies power to [by mandate] influence the collateral or the company itself. They should not be any regulatory forbearance. Every loan is given say 1%. If the company looks bad to you – mark it as 2%. But I will not give you any forbearance from a regulatory saying because AAA then put less but AA put more – nothing of that sort. Throw that out the window and everyone gets a standard 0.5% and if you guys want to use the rating agency the buyer of the loan rather than the company itself, the banker or the mutual fund – they should pay.

They get that rating and use that to determine higher or lower – but that will change the concept of rating shopping in the first place. It will make rating more independent and because of the regulatory restriction not allowing anything to be based on rating – you will actually end up with a system that has actually independent rating agencies. And you can actually believe their opinions a bit more.

S: They can say what they really think as opposed to holding back or…

D: They will hate it because they become much less viable businesses because I might say I know this company better than the rating agency does. Many times people do and that’s why they buy the companies [in defiance of the rating].

People who buy junk bonds. They’re not necessarily ignorant. The concept of junk is because the rating is less than Investment grade. They may actually be pretty good. Carnival cruises which has been managing cruises for all this time – they are a junk bond company because they used to issue bonds and the rating agencies said [it was] very risky. And then they would pay 13-14% on their loans.

Recently they’ve issued more bonds. The Fed has said – I don’t care about the rating agency calling it junk or not, I’m going to still buy your bonds. They’re buying those bonds. People are saying the Fed is a bad actor for buying junk bonds – yet because of their actions, Carnival Cruises has been rescued at a much lower price and eventually they may be able to continue to operate and keep their 1,000 or 2,000 jobs just because of this action.

Rating agencies somehow cease to have importance for the regulator when those things happen – but they continue to give them importance on other things.

We actually create in India a different set of problems. Gold Loan companies where gold is backing the loans that they give. They get a AA rating. Why? Because of some past issues.

At the same time you give another company which does unsecured loans, secured against nothing – microfinance companies and all that – some of these companies – even real estate companies – who have 30% exposure to developers – who are in deep deep trouble today. Those companies get a AAA. Whereas a gold loan company gets a AA. It’s almost like it’s a different standard. You’re almost saying listen I can’t rate that AAA company because the owner of the company is a big shot who will have me sentenced to death or something [this is a joke] – that’s the king of fear, no one downgrades the more popular players. But at the same time, I would still say that there is tremendous amount of good research that these guys do. Every once in a while it does come out.

They do some good research, I’ve often found that when they don’t downgrade or upgrade but give say we’re continuing the rating the subtext or the notes of the rating documents has enough information for you to be able to make financial decisions.

For instance once they said, oh the promoters said they will buy more shares in the company and strengthen the company’s balance sheet. But they didn’t do so. Yet we continue to rate it the same. I don’t care about the rating but that one statement is enough for me to say I’m getting out of this company.

It’s useful in a way that maybe they didn’t intend it to be. But since my respect for them is not so much, I don’t really care about what they think of what I think of them.

One other thing is the trust deficit is quite high. What you call high or low – I don’t care about. But you know I understand that because of compromises and incentives you are not going to give me actionable information.

I really feel that the rating agencies should change this system in which they kind of treat different things differently.

There’s an internal class system they have developed. Whether it is between companies or across countries. The developed countries get a different framework to work with. What they call the non-developed is held to a different standard.

Russia is a horrible rating – because it defaulted at one point of time. It has 14% debt to gdp. It’s almost like saying – what are you exactly downgrading? They have a worse rating than India but the Russians don’t care.

S: there were rumors that the Chinese were trying to create a rating agency system?

D: Yes, China does have its own rating agencies and they treat debt very differently. The one problem with the Chinese rating agency is that they are not going to get worldwide sanction. The other issue is that they rate things based on an enormous amount of internal data. What they choose to tell you is very different.

At this point if a Chinese rating agency gave you a glowing recommendation of a company – you will not believe it. If they told you something was really bad – you would still not believe it. It’s kind of like within China they might rate things very well but outside of China they are meaningful.

India also has its own rating agencies that are right now owned almost by the US rating companies.

Like a worldwide currency, such rating agencies are only useful if everyone respects them. If the minute you lose respect – it’s like Visa. If enough people stopped using Visa it will immediately collapse [- it’s almost like a switch or tipping point beyond which it is ubiquitous vs. useless].

S: For all their flaws do you think they’re still needed. How should we consider them going forward?

D: Every once in a while they will come out with an interesting concept saying India we’re downgrading or upgrading or doing something. I think rating agencies form an important role if we remove their dis-incentives to give correct information. Which means we remove the ability to loan terms or investments related to ratings.

Don’t do things that are reflexive. Reflexive meaning if I rate you and if I increase your rating, you become more attractive to the world and therefore your rating will even further improve. But the downward spiral it’s the other way. But if I downgrade you, my downgrade has itself caused you to become worse. So the observer becomes the player.

Remove that completely from our regulatory perspective – ban it. Say that listen if you have a loan covenant that is linked to the rating, I will make the provision 10% of capital. No one will then have such loan covenants.

One the second part, I will not allow you to link it to AA or AAA and stuff. You have to have an internal rating team that has to go in and formulate its own opinions.They can take the help of a rating agency by paying them. The company should not pay them. You should take those two things out. You suddenly form an actual need for independent rating agencies. Which can then build proper insights to do this.

If people don’t like what a rating agency has to say, it’s like a certain tv channel with a certain tv anchor that is shouting all over the place. You can switch off the tv channel and never watch it again. It is an opinion that can continue to exist without you having to listen to it at all points of tmme. Treat rating agencies as tv channels with crazy anchors. That’s about it. The market has already deemed them irrelevant. Markets [in many instances] operate independently of rating agencies and I wouldn’t be surprised if more money came into Indian debt after the downgrade. Till now people were fearing the consequences of the downgrade, but now it has been downgraded the event is over, let’s get on with life because these guys were irrelevant anyway.

Many smart people do work at these agencies, I’d love to see their insights in a more independent framework rather than where it is.

S: Well put. So thanks Deepak, this was awesome. And we’ll look at how the bond interest rates going forward!

D: We have a debt masterclass – if you guys want to understand what’s happening in the debt and debt mutual fund world. Visit

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At this point, I’d love thank you all and we’ll do more podcasts as the news evolves.


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