Modeling Sovereign Rating of India

Abstract

Against the background that India has been continuously receiving for over a decade till now the same investment grade of sovereign rating, the authors research what the important indicators of sovereign rating are and how to predict the probability that the ratio of foreign direct investment to gross domestic product of a country will be above average. They reviewed existing works and detected certain gaps. In the course of plugging those gaps, the authors collected cross section data available on economic, financial, and institutional variables of the emerging economies of ASEAN and SAARC members. They applied principal component analysis to distill relatively more effective variables determining sovereign rating, and then they applied logistic regression to these variables in order to compute the above probability. The methodology has proved successful in reproducing the past and useful as an internal model of assessing relative sovereign riskiness of an emerging economy among its peers. The work prescribed some policy to improve the aforesaid ratio of India.