Global ratings agency Moody's on Thursday enhanced India's sovereign rating to positive from stable, expecting positive steps from policy-makers to spur growth and put the country ahead of peers -- a development that finance ministry said was significant.
"Moody's decision to revise the ratings outlook to positive from stable is based on its view that 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 coming years," Moody's Investors Service said in a statement.
"India has grown faster than similarly-rated peers over the last decade due to favourable demographics, economic diversity, as well as high savings and investment rates," it said, adding these, along with global developments, will keep India's growth higher than that of its peers.
Reacting to the development, finance minister Arun Jaitley said: "Moody's has changed rating outlook to positive from stable and affirms Baa3 rating. The upgrade in outlook is significant, but we've got to do more."
The Baa3 rating incorporates the risk that higher levels of growth and infrastructure development will be accompanied by higher leverage. Sovereign credit improvements over the next 12-18 months will depend on the extent to which growth, policies and buffers can contain risks, it said.
The agency, however, did not raise the sovereign credit rating due to some factors. Some 16 months ago, when the United Progressive Alliance (UPA) government was at the helm, it had warned of a downgrade if government policies were seen as harming growth.
"India's Baa3 government bond rating incorporates credit strengths, such as its diversified economy, robust growth prospects, relatively high domestic savings rate and high international reserve buffers," it said.
"It also reflects India's weaker performance, relative to peers, on fiscal, inflation and infrastructure-related metrics. And while policies are beginning to address each of these factors, the extent of likely improvements is as yet unclear," it said.
"Moreover, India's banking system's asset quality, loan loss coverage and capital ratios are relatively weak," it said, and added this posed credit risks because of the financial sector's role in financing growth and the government's deficits.
"In the absence of any improvement in banking-system metrics over the coming months, India's sovereign credit profile will remain constrained."