In a boost to Prime Minister Narendra Modi ahead of his arrival in the United States, Standard & Poor's raised India's credit rating outlook to stable on the back of strong political mandate helping fiscal and economic reforms.
The ratings agency, after a gap of two years, has improved the country's sovereign credit rating outlook from negative to stable indicating the possibility of a rating upgrade.
"Our outlook revision indicates that we believe the current government's strong mandate will enable it to implement many of its administrative, fiscal, and economic reforms," S&P said in a statement.
The revision in outlook comes ahead of the prime minister's high profile visit to the US, which is aimed at procuring investments, among other things. Modi is scheduled to meet top corporate leaders of US.
The outlook revision gave a boost to the stock markets with the benchmark Bombay Stock Exchange (BSE) Sensex shooting up by 158 points to 26,626.32.
The present government, S&P said "will remedy, to varying degrees, the growth impediments - policy paralysis, energy supply bottlenecks, and administrative obstacles. The government's actions will likely add momentum to the incipient cyclical upswing evident in the economy".
Commenting on the action, Finance Secretary Arvind Mayaram said the domestic economy can grow by more than 5.5 per cent in the current fiscal year.
"We are satisfied that the credit rating agency has acknowledged the steps that government has taken to improve the economy and specially bring the investment climate back and therefore the growth cycle back," he added.
The American financial services company said it could raise the rating if the economy reverts to a gross domestic product (GDP) trend growth of 5.5 per cent and there are improvements in fiscal, external or inflation metrics.
The agency currently has a 'BBB-/A-3' rating on India.
State Bank of India Chairperson Arundhati Bhattacharya said S&P's action was a reflection of the country's sound external position, supported by robust capital inflows and a benign current account deficit (CAD).
In April 2012, S&P had lowered India's rating outlook to negative in view of inability of the previous UPA government to take up reform measures and declining investor confidence.
Pursuant to landslide victory of Modi-led Bharatiya Janata Party in May 2014, there has been an upsurge in investor confidence with stock markets rallying 19 per cent and increase in foreign investment. Growth also picked up to a nine-quarter high of 5.7 per cent in the April-June period.
S&P said the stable outlook for the next 24 months reflected the agency's view that the new government had both the willingness and capacity to implement reforms necessary to restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the Reserve Bank of India (RBI) to carry out an effective monetary policy.
However, the agency cautioned that it could lower the rating in case the government's structural reform agenda stalls such that economic growth does not accelerate, or fiscal and debt ratios fail to improve.
It also highlighted that key constraints to improved ratings were "low wealth level" and "weak public finances".
The new administration would adhere to its stated fiscal consolidation programme, S&P said, adding that planned revenues may not fully materialise and subsidy cuts may be delayed.
After taking over as Prime Minister in May, 64-year-old Modi has launched a host of initiatives, including 'Make in India' campaign to improve business environment and fetch more foreign investments (FDI).
S&P expects improved fiscal performance in the medium term primarily from revenue-side improvements brought about by the planned introduction of a national Goods and Services Tax (GST) and administrative efforts to expand the tax base.
Besides, S&P also raised rating outlook to stable from negative of six Indian corporates, including ONGC and Reliance Industries.