What is a Rating Agency?

• A rating agency is a company that assesses the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts. 
• The rating shows an agency’s level of confidence that the borrower will honor its debt obligations as agreed. Each agency uses unique letter-based scores to indicate if a debt has a low or high default risk and the financial stability of its issuer. 
• The debt issuers may be sovereign nations, local and state governments, special purpose institutions, companies, or non-profit organizations.
• In India, the Securities and Exchange Board of India (SEBI) primarily regulates credit rating agencies and their functioning.

How ratings affect the market?

• At the corporate level, companies planning to issue a security must find a rating agency to rate their debt. Rating agencies such as Moody’s, S&P Global Ratings, and Fitch perform the rating service for a fee. Investors rely on the ratings to decide on whether to buy or not to buy a company’s securities.
• At the country level, investors rely on the ratings given by the credit rating agencies to make investment decisions. Many countries sell their securities in the international market, and a good credit rating can help them access high-value investors. A favorable rating may also attract other forms of investments like foreign direct investments to a country.
• A rating downgrade means that bonds issued by the governments are now “riskier” than before. Lower risk is better because it allows governments and companies of that country to raise debts at a lower rate of interest.