Rating agencies need to review their framework, says CEA Nageswaran

Says global financial institutions tend to accentuate spillovers for developing economies

Credit rating agencies need to review their framework as they encourage spillovers, Chief Economic Advisor V Anantha Nageswaran said here on Friday, asserting that they played a part in the propagation of the 2008 economic crisis.

Speaking at the Indian Institute of Management-Kozhikode's inaugural annual conference on macroeconomics, banking and finance, he said the rating agencies downgrade a country after its fundamentals have already deteriorated and it is time for that nation to start rebuilding.

“The role that they (rating agencies) played in the propagation of the crisis was very evident in 2008 rating both in mis-valuing the collateralised damage, and then on downgrading them (the countries) in one swoop,” he said.

Noting that the countries should set monetary policies according to the needs of the domestic economy, Nageswaran said the interest of global financial institutions and their clients tend to accentuate the spillovers for the developing economies.

He also said he was not very sure about the world economy becoming more fragmented as is the general belief.

"In terms of global trade volumes, it is very difficult to disentangle the effects of economic slowdown and the fact that there could be trade restrictions, both of the tariff variety and non-tariff variety. Countries are focussing on friend-shoring and re-shoring, all those things are definitely happening. So, it is not that we are in the golden era of globalisation. But, based on trade data, it is difficult to make out the case that we are definitely becoming more fragmented," Nageswaran said.

He noted that de-risking the economies from Chinese supply will be a long process.

“When we talk of de-risking from China supply chain, we should be under no illusion that it is not something that can be achieved at the speed with which you can put out a tweet. It is going to take much longer," Nageswaran added.