Sovereign risk is the risk that a national government will default on its debt obligations, impose capital controls, repudiate contracts with foreign investors, or take actions that adversely affect the value of investments made within its jurisdiction. It encompasses both the ability and the willingness of a sovereign government to meet its financial commitments. Sovereign risk is assessed by credit rating agencies such as Moody's, S&P, and CRISIL through sovereign credit ratings — India currently holds an investment-grade rating with a stable outlook. For Indian equity and bond investors, sovereign risk is most directly relevant when investing in government securities, infrastructure bonds backed by government guarantees, or companies with significant exposure to government contracts. Rising sovereign risk — as reflected in widening sovereign CDS spreads — typically increases borrowing costs across the entire economy and puts downward pressure on the currency and equity markets.
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