Every corporate bond, commercial paper and rated deposit carries a short code — AAA, AA+, A1+ — that sums up an agency's view of how likely the issuer is to pay on time. Ratings make fixed-income investments far easier to compare. They are also widely misread as promises of safety, which they are not.
Who rates, and what is rated
Credit rating agencies in India are registered with and regulated by SEBI. They rate specific instruments — a bond issue, a commercial paper programme, a deposit scheme — based on the issuer's financial strength, business, management, the instrument's structure and any security or support behind it. Since 2011, SEBI has required agencies to use standardised symbols and definitions, so that a AA from one agency is meant to signify the same as a AA from another. Each rating carries the agency's name as a prefix.
The long-term scale
| Rating | What it indicates |
|---|---|
| AAA | Highest degree of safety regarding timely servicing of debt; lowest credit risk |
| AA | High degree of safety; very low credit risk |
| A | Adequate degree of safety; low credit risk |
| BBB | Moderate degree of safety; moderate credit risk |
| BB | Moderate risk of default |
| B | High risk of default |
| C | Very high risk of default |
| D | In default, or expected to be in default soon |
Modifiers (+ and −) show relative standing within the AA to C categories. AAA through BBB− is generally called investment grade; below that is speculative, or sub-investment grade.
Short-term ratings
Instruments with an original maturity of up to a year, such as commercial paper, use a separate scale from A1 (strongest) through A4, with D for default. A plus sign indicates relative strength within a category, so A1+ is the highest short-term rating.
Outlooks, watches and trends
A rating comes with context:
- Outlook: stable, positive or negative — the agency's view of the likely direction over the medium term.
- Rating watch: a signal that a change may be imminent because of a specific event or development.
- History: how the rating has moved. A series of downgrades tells a different story from a long, stable record.
What a rating does not tell you
- Interest-rate risk. A AAA bond with a long maturity can still fall sharply in price when rates rise — see why bond prices fall when rates rise.
- Liquidity. A highly rated bond can still be hard to sell quickly at a fair price.
- Value. Two AA-rated bonds can offer different yields; the rating does not say which is better value.
- Certainty. Ratings are opinions formed from available information. Issuers have been downgraded sharply, sometimes within weeks, when conditions changed or new facts emerged, and highly rated instruments have occasionally defaulted.
- Suitability. A rating describes an issuer's capacity to pay, not whether an instrument fits your plan.
Ratings and yield
Lower-rated instruments generally have to offer higher yields to attract investors. The difference between a corporate bond's yield and that of a comparable government security is its credit spread — the market's own, continuously updated view of the risk. When an instrument offers a yield well above others with the same rating, ask why: the market may be pricing in something the rating has not yet reflected.
Ratings inside mutual funds
Debt fund factsheets show the portfolio's split by rating — sovereign, AAA, AA and below — and every debt scheme carries a Potential Risk Class that caps its credit risk. A scheme in credit-risk class A limits itself to relatively low credit risk; class C permits more. See how to read a riskometer for how the classes are presented.
Ratings on deposits
Corporate and NBFC fixed deposits are rated too, and for deposit-taking NBFCs a rating is a regulatory requirement. Because these deposits are not covered by deposit insurance, the rating is one of the main tools you have — see bank FDs vs corporate deposits.
Using ratings well
- Use them to filter, not to decide. Set a quality floor that suits the money's purpose, then look further.
- Read the rationale. Agencies publish rating rationales that set out key strengths and risks — a short read that adds a great deal of context.
- Diversify. Even among high ratings, spreading across issuers limits the effect of a single surprise.
- Keep watching. Check ratings and outlooks from time to time, not only when you invest.
The Bond Yield & Cashflow tool shows how a bond's price translates into yield, so you can see what extra return a lower rating is offering.