Standard & Poor's today improved India's outlook to stable from negative saying the new political formation at the Centre has the capacity to push reforms and put the country back on high growth trajectory.
"We could raise the rating if the economy reverts to a real per capita GDP trend growth of 5.5 per cent per year and fiscal, external, or inflation metrics improve," the global rating agency said.
The revision in outlook comes ahead of Prime Minister Narendra Modi high profile visit to the US, which among things is aimed at procuring investments. Modi is scheduled to meet top US corporates.
The stable outlook, it said, reflects the agency's expectation that the newly elected government will be able to implement reforms that spur growth, which in turn improves fiscal performance.
S&P has affirmed the 'BBB-/A-3' sovereign credit rating on India and revised the outlook on the long-term rating to stable from negative. Stable outlook reduces risk of any possible sovereign rating downgrade.
"The stable outlook for the next 24 months reflects our view that the new government has 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 RBI to carry out effective monetary policy," it added.
S&P also 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.
After taking over as Prime Minister in May, Modi has launched host of initiatives, including 'Make in India' campaign to ease business environment and fetch FDI.
Commenting on the new outlook, Finance Secretary Arvind Mayaram said: "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."
When asked that the rating has not been upgraded, he said the government is neither disappointed nor sorrowful.
He said rating agencies have their own methodology and sometimes there "may be divergence with the way we assess the economy".
In 2012, S&P had lowered India's credit outlook from stable to negative. It further said the ratings on India reflect the country's strong external profile, combined with its democratic institutions and free press, both of which underpin policy stability and predictability.
"These strengths are balanced against the vulnerabilities stemming from the country's low per capita income and weak public finances," it added.
The rating agency further said India's external position is a key credit strength. The country has relatively little external debt and a much improved external liquidity position.
"We project that, at the fiscal year end of March 31, 2015, external debt net of external assets will be 6 per cent of current account receipts (CARs)," it said.
It said the government's actions will likely add momentum to the incipient cyclical upswing evident in the economy.
"We project real per capita GDP growth to reach 5 per cent by next year, and per capita GDP to surpass USD 2,000 by 2017," the S&P statement said.
S&P expects the new administration to adhere to its stated fiscal consolidation programme, even though "we acknowledge that planned revenues may not fully materialise and subsidy cuts may be delayed".
It expects that 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.
S&P projects net general government debt to decline to below 60 per cent of GDP by the year ending March 2018, and with it, general government interest rate expense to just under 20 per cent of revenues.
"A faster pace of deficit and debt reduction is unlikely in our view. Hence, we believe fiscal and debt metrics are set to remain key rating constraints for some time," it added.
On Current Account Deficit (CAD), S&P expects it to widen from the current low of 1.8 per cent of GDP (as of March 2014) as investment picks up, gross external financing needs are likely to remain at or below the sum of CARs plus usable reserves in the next two to three years.
The benchmark Sensex today rose by 157.96 points, or 0.60 per cent, to close at 26,626.32.