Agencies ineffective to provide warnings in advance of financial crises, says Arvind Subramanian

Chief Economic Adviser Arvind Subramanian on Thursday discussed about the assessments done by the international ratings agencies and highlighted their values in light of their failure to provide warnings in advance of financial crises.

"Today, I want to illustrate a few examples from recent Indian experiences," said Subramanian while speaking at the Competence, Truth and Power: Macro-economic Commentary in India VKRV Memorial Lecture, Subramanian.

In his first example, he highlighted the International Ratings Agencies with compromised analysis and assessments.

He said that in recent years, the role of ratings agencies has increasingly come into question.

"In the US financial crisis, questions were raised about their role in certifying as AAA bundles of mortgage-backed securities that had toxic underlying assets (described in Michael Lewis' The Big Short)," he said.

"Similarly, their value has been questioned in light of their failure to provide warnings in advance of financial crises. Often ratings downgrades have occurred post facto, a case of closing the stable doors after the horses have bolted," he added.

Adding to this, the Chief Economic Adviser said that in recent years, the rating agencies have maintained India's BBB-rating, not withstanding clear improvements in our economic fundamentals (such as inflation, growth, and current account performance).