This memo examines the efficiency of the rating system for commercial paper (CP) issues in India, for issues rated A1+ that constitute over 97 per cent of issues by volume. Even within a single rating category, CP issues by different issuers have a large variation in spread within a month—over 200 basis points from the 10th to the 90th percentile—suggesting significant differences in credit risk across issuers in this market. The market implied probability of default (measured using the Merton's ‘Distance to Default’) as well as the issuer's long-term ratings, have significant economic and statistical power to explain the spread of CP issues. The baseline results suggest that a non-financial borrower with a long-term rating of AAA has a CP spread that is 85 basis points lower than a non-financial borrower with a long-term rating of A. The corresponding difference between AAA and A rated financial borrowers is 42 basis points. This holds even when the same rating agency rates the long-term debt and the CP issue, implying that differences in rating methodology cannot explain the difference in spreads. Overall, the results suggest that there is scope for improving the informativeness of CP ratings in India by creating finer grades in the A1+ category.