Finance minister Pranab Mukherjee said there was "no need for panic" after the rating agency Standard & Poor's downgraded the country's outlook from stable to negative on Wednesday.
India is likely to pass some financial reforms in the current session of Parliament, which started on Monday, he added.
"There is no need for panic," Mukherjee told reporters.
"The situation may be difficult, but we will be surely able to overcome (it)," he said.
The lowered outlook jeopardises India's long-term rating of BBB-, which is the lowest investment grade rating.
"The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting," S&P credit analyst Takahira Ogawa said in a note.
India's 10-year bond yield rose 4 basis points to 8.63%, while the rupee weakened to 52.64 against the dollar from 52.48 before the action.
Stocks were also hit, with the main BSE index down 0.9%.
India's fiscal deficit swelled to an expected 5.9% of GDP in the fiscal year that ended in March, far above the government's 4.6% target.
Many economists believe New Delhi will have a tough time hitting its target of cutting the deficit in the current fiscal year to 5.1% of GDP, given a hefty subsidy burden and a weakened government that has failed to push through significant reforms.
The general elections looming in 2014 are expected to limit the prospects for significant reforms that would improve the investment climate and India's fiscal position.
"The writing was on the wall given the country's weakening debt profile and sluggish investment climate," said Radhika Rao, economist at Forecast Pte in Singapore.
"With the coveted investment grade now at risk, one can only hope this acts as a wake-up call for the government," she said.
Moody's has a Baa3 rating on India, while Fitch rates India BBB-. Both are also the minimum investment grade ratings. Moody's in December issued a stable outlook for India.