Ignore ratings, but not the confidence levels!

Everybody is busy bashing rating agencies and I am no exception. Only yesterday I was telling my colleagues why a time will come when these agencies would go out of business. Recently it was emphasised in the G20 meet also that reliance on rating agencies should be reduced. (see The Hindu article)

The best rebuttal of these agencies came from the markets which reflected the irrelevance of these ratings in the yield rates. The US bond yields went down after a downgrade and so was the case in UK recently. (see Bloomberg article)

Indian ministers would certainly be happy with this antagonism towards the rating trio – they are an apt scapegoat to blame and to divert the nation from what is ailing the Indian economy. However, would the Indian economy be doing any better if the agencies didn’t exist? I am not sure.

Each economic unit (household, companies, labour, etc.) is a de facto rating agency in an economy. If a household is gloomy because of high inflation it would impact growth by lowering demand. If a company is skeptical of growth in the days to come it will pass on the scepticism to its suppliers, its employees and so on. So if the economic units are feeling low about the economy, only positive policy actions or positive external shocks can help the economy and ratings aren’t that relevant.

So ignore the rating downgrades if you wish but do not ignore issues like increasing fiscal deficit on the back of irresponsible policies, poor governance, policy paralysis, and infrastructure constraints to name a few that hurt the confidence of the consumer as well as the investor in the Indian economy. You can ridicule 3 rating agencies but ridiculing each economic unit’s sentiment should be done at one’s own peril.