Page 131 - ES 2020-21_Volume-1-2 [28-01-21]

114 Economic Survey 2020-21 Volume 1

Figure 42: Average Change in Annual Macroeconomic Indicators and India’s
Sovereign Credit Rating Changes (1998-2018)

40%
36% 36% 37% 37% 37% 37%
35% 33% 34% 32% 32%
31% 30%
30%
25%
Year (per cent) Average Change in Select Indicators over Previous 20%

15%
10%

5%
0%
Average of Average of Upgrades Average of Threshold Average of Threshold
Downgrades Downgrades Upgrades

Year Before Year of Change Year After

Source: RBI, MoSPI, IMF and Survey Calculations

Box 7: Methodology for Probit Regression of Determinants of India’s
Sovereign Credit Rating Upgrades and Downgrades

Using data from 1998-2019, we performed two probit regressions, one each for the event of a
sovereign credit ratings downgrade and upgrade for India.

Table 6 below reports results for the following probit regression for India’s sovereign credit ratings
changes:
Ratings Downgrade = β Real GDP Growth Rate* (quarter-on-quarter growth) + β Fiscal Deficit
1
2
(annual, per cent of GDP) + β Consumer Price Inflation (annual change, per cent)
3
Ratings Upgrade = β Real GDP Growth Rate* (quarter-on-quarter growth) + β Fiscal Deficit
2
1
(annual, per cent of GDP) + β Consumer Price Inflation (annual change, per cent)
3
Where Ratings Downgrade = 1 for years when India’s sovereign credit rating was downgraded by
either S&P, Moody’s or Fitch, and 0 otherwise

and Ratings Upgrade = 1 for years when India’s sovereign credit rating was upgraded by either S&P,
Moody’s or Fitch, and 0 otherwise

*GDP quarterly data from RBI. Base year 2011-12 for 2011-19, base year 2004-05 for 2004-11 and base year
1999-2000 for 1998-04

3.53 Table 6 reports coefficients of probit regression for the event of a ratings downgrade and
ratings upgrade based on three explanatory variables: GDP growth rate (quarter-on-quarter),
fiscal deficit (annual, as per cent of GDP) and consumer price inflation (annual, per cent change).
Of the three explanatory variables, fiscal deficit and consumer price inflation are found significant