Standard & Poor's Ratings Services today said that it had raised its sovereign credit ratings on the Republic of India to 'BBB-/A-3' from 'BB+/B', with a stable outlook.

The rating agency sys the upgrade to investment grade reflects the country's strong economic prospects and external balance sheet, and its deep capital market, which supports a weak, but improving, fiscal position.

"India's economic prospects remain strong and are rising gradually, with GDP trend growth likely to average more than 7.5 per cent in the medium term," S&P's credit analyst Ping Chew said.

He says,"Gradual reforms and consistent monetary and fiscal policy stances have also sustained macroeconomic stability. This has led to strong growth prospects and attracted foreign and non-resident Indian capital. India's strong institutions have also provided for relative stability in policy, politics, and business environments against volatility usually associated with lower income levels."

Moreover, India's external balance sheet is strong due to reserves accumulation and prudent debt management. Its foreign-exchange reserves, now more than 16x short-term debt and 5x gross financing requirements, provide a buffer from changes in external and domestic investor confidence. These strengths are likely to continue, despite the current account deficits, on the expectation of strong capital inflows.

"The upgrade also reflects an improving fiscal position. Fiscal consolidation commitments across all levels of governments look to be entrenched," Chew said. He elaborated saying, "Governments are likely to be able to manage the fiscal vulnerabilities. India also has a well-functioning bond market, especially when compared with its rated peers and income group, providing long-term financing for the government's deficits. The pace of deficit narrowing should continue, and faster than Standard & Poor's initial projection The central government's budget deficit for the current year seems to be back on track to meet its target of 3.8 per cent of GDP due to strong revenue collection.

"State governments' fiscal estimates for the current year suggest that the combined central and state government deficit is likely to fall below 7 per cent of GDP. The secular decline in general government deficits in the medium term is likely to continue due to tax reform and improved administrations, and implementation of fiscal responsibility laws across more state governments, currently enacted by 23 out of 29 state governments."

"The ratings on India, however, remain constrained by the country's weak fiscal profile, especially its high government debt burden and deficit, which is still one of the worst among all rated sovereigns. Further rating improvements will depend on sustained prudent fiscal policy that leads to a decline in the government debt and interest burden, and further reforms that lift the country's growth prospects and income levels.

Inappropriate policy mix that increases the vulnerability of India's still-weak fiscal flexibility, and erode external and growth strengths could lead to downward pressures on the rating."

Finance minister P Chidambaram attributes the ratings upgrade to good economic fundamentals and said that the rating was an acknowledgment of India's improving macroeconomic stability and strength.