Are credit rating agencies dictating the policies of democratic economies?

India has been among the very exclusive club of countries which have been recording steady and high growth rates in the last decade even in the times of global financial crisis. Yet it finds itself with a negative rating by all the major credit rating agencies. The question is: Is India falling to the favours of CRAs and in turn putting their own set of policies at bay?

Credit rating, mainly, is an opinion on the future ability and legal obligation of the user to make timely payments of principal and interest on a fixed income security. This helps investors to make decisions to invest in more healthy stocks and indices. However, the reality is that presently financial institutions and rating agencies have become so powerful that ratings, if not favourable to a nation, may have a very bad effect on these.

A large section of people also have doubts over the reliability of the ratings of the CRAs grading, considering the present downgrading by S&P has come at a time when Indian economy is to an extent in a better position than several months ago. Regarding inflation, fiscal position and growth rate expectations, Indian economy is not in a worse position now. 

The most striking feature of these ratings is that these are shaking the very basis of democratic set-up of the countries. Many economies are framing their annual budgets and making policies that please the CRAs which is a testimony to the fact that the nations are not operating fully independently and the rating agencies have been indirectly dictating the policies of these nations.

It is high time that these rating agencies need to go through some strict verification and regulation by a third party institution. That will ensure transparency and will give a scientific and rational explanation of the grading and rating system.