Zerodha co-founder Nikhil Kamath has described credit rating agencies Moody’s, Fitch and S&P as ‘arbitrary’ in nature and called them detrimental to the long-term growth of India.
In his podcast WTF, Kamath shared his views with OYO founder Ritesh Agarwal, Mamaearth’s Gazal Alagh and Rare Rabbit’s Manish Poddar.
“I think it's a big problem. I think we're [India] BB minus. I'll tell you it's such a big problem we don't talk about it enough. Every country's cost of borrowing is dependent on how we are rated by these three arbitrary agencies,” Kamath said.
He questioned the criteria the credit rating agencies use to measure and give ratings to the nations.
“Six are quantitative in nature like GDP rate, fiscal deficit, inflation, past track record of servicing debt. The other 10 or 11 parameters are arbitrary in nature. It's more coming around perception and stuff like that. And at triple B minus, correct me if I'm wrong later but I think it's triple B minus now, our cost of borrowing is higher than countries which are one-tenth our size,” he added.
He explained: “Let's say Kazakhstan has the same rating as us or slightly lower or whatever …slightly better rating. Let's assume Kazakhstan has better than us. I don't think they do, I think they're slightly below us in the table. If they're able to borrow money at 5 per cent for infra projects, building roads, train airport. We land up borrowing at 6.5 cent.
He said the small difference in interest rate would amount to a significant outgo of India's wealth over the years.
“A 20 year term loan, if you're borrowing Rs 10,000 crore…in reality these numbers are significantly larger than Rs 10,000 crore… When we are paying back at the end of 20 years this 10,000 we are paying back maybe 25,000, they are paying back 17-18,000. That tiny difference in rating changes our cost of infra significantly.”
Oyo’s Agarwal agreed with Kamath and suggested the ratings had a trickle-down effect on companies of that country.
“And it is not just for the country, right. It's also for corporations whose source of income is India. So if you are an Indian corporation, you may be like any big company, you don't get a A rating because your sovereign itself is not rated that,” Agarwal said.
Kamath said that this particular issue needs more spotlight. “But this is something we all need to make noise about. I think what these three agencies together are doing is extremely unfair and bad. Very detrimental to the long-term growth of India,” he added.
Moody's has the rating Baa3 with a stable outlook for India. Baa3 indicates the lowest investment grade for a debt security or an issuer of debt (like a company or government). S&P and Fitch both have affirmed India as BBB- with a stable outlook. BBB- signifies India's creditworthiness falls within the lowest investment grade category.
The economic division of India’s Finance Ministry had released a paper in December last year citing opaqueness in the rating methodologies of Moody’s, Fitch and S&P. The government’s chief economic adviser (CEA) V Anantha Nageswaran and Rajiv Mishra, a senior government adviser, had argued that the rating agencies should share their methodology so that developing nations could take appropriate steps to improve their ratings.