IMHO, it was a sign of weakness not strength.
In a period of low-interest rates globally,
India had to offer 8.5% Dollar-denominated returns and ~7% Euro-denominated returns to attract investment.
That is just one aspect of credit-worthiness.
The credit rating for sovereigns also accounts for
how well established in the Global economy a sovereign is currently and in the near future,
including their Forex reserves and revenues (even if projected).
In 2000, the US Govt. itself was offering ~6% returns over 3-10 years,
Source: https://www.govinfo.gov/content/pkg/ERP-2011/pdf/ERP-2011-table73.pdf
India had to offer ~8.5% on a 5 year bond,
to account for the additional risk that
India might not have sufficient USD at the end of 5 years
(however remote the possibility may be).
Also, due to competitive pressure,
these rating agencies continued to rate highly
even securities with known low-quality constituents.
Here’s a dramatic recreation of the same, from the movie The Big Short (2015)
IMO, it is perfectly fine to ignore the upside of these credit-ratings.
But better to pay extra attention whenever a credit-rating is downgraded.
(FWIW, like trailing indicators in TA,
these rating-downgrades often occur after the fact, most of the time.)
A similar situation exists today in the Indian domestic bond market.
A bunch of NBFCs have popped-up,
offering retail individuals access to corporate bonds
offering returns twice as much as sovereign bonds.
(often digitally, at a click of a button on some page).
However, upon careful consideration,
the risk-adjusted returns on offer are only marginally higher.
Assuming the typical “invest in bonds for stability” approach,
the additional 0.2 - 0.3% of expected-utility in corporate-bonds compared to GSECs, hardly seems worth it.
Considering the impact of losing the entire principal invested, on one’s life/plans.
…or is it loss-aversion at play here ?