Global rating agency Moody's Investor Service, on Thursday, upgraded India's credit rating outlook to positive from stable, saying that reforms initiatives of the new government will enhance country's economic strength.
"There is an increasing probability that actions by policy makers will enhance the country's economic strength and in turn, the sovereign's financial strength over the coming years," Moody's said in a statement.
India has grown faster than its similarly-rated peers due to favorable demographics, economic diversity and high savings and investment rates, the statement said.
While affirming India's Baa3 rating, the agency said evidence over the coming months that policymakers are likely to be successful in their efforts to introduce growth-enhancing and growth-stabilising economic and institutional reforms would lead to the rating being considered for an upgrade.
"Moody's India upgrade validates: government reform thrust, better growth, macro outlook, budget strategy of public investment, fiscal discipline," Chief Economic Advisor to Indian government, Arvind Subramanian tweeted.
Moody's outlook upgrade follows the Reserve Bank of India's (RBI) decision to keep key interest rates unchanged at this week's meeting and the central bank intended to wait to gauge the effects of unseasonal rains on inflation before embarking on further policy easing. RBI has already cut rates twice so far this year, supported by benign inflation scenario.
Moody's believes that recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development will reduce some of India's sovereign credit constraints.
The Indian stock markets reacted positively to Moody's rating action, with S&P BSE Sensex rallying 168 points in the opening session before paring the gains. The rupee also strengthened by 10 paise to 62.16 in the early trading session on outlook upgrade.
However, the rating shows that recurrent inflationary pressures, occasional balance of payments pressures, and an uncertain regulatory environment have contributed to periods of volatility in growth, and have exposed India to external and financial shocks, constraining its credit profile.
Things are looking bright for the Indian economy as many agencies have come out with a more positive outlook on the back of reforms promised by the Narendra Modi's government.
India's reform drive and economic momentum could give plenty of growth opportunities to India's top corporate, Standard & Poor's Ratings Services said in a report released in March.
The Asian Development Bank (ADB) projects India's gross domestic product (GDP) to grow 7.8 percent in the fiscal year 2015-2016 and accelerate to 8.2 percent in 2016-2017, surpassing the growth rate of China, the world's second largest economy.