Ratings agency Moody's Investors Service on Tuesday upgraded its outlook on India to stable from negative, saying downside risks in Asia's third largest economy and its financial institutions have reduced.
Moody's affirmed India's sovereign credit rating at Baa3.
"The decision to change the outlook to stable reflects Moody's view that the downside risks from negative feedback between the real economy and financial system are receding," the agency said in a note.
Moody's said India's decision to keep the financial institutions flush with liquidity also reduced the risk to the country from the financial sector. The Indian economy has shown signs of a strong rebound after a second wave of COVID-19 infection killed thousands of people in April and May.
The latest move by Moody's supports the government view that India is rebounding at a pace faster than earlier anticipated and doubts about its economic revival have been put to rest.
"India's sovereign ratings outlook upgrade to stable reflects an improving financial system and near term growth prospects, which combines into solid potential growth prospects in the medium term," said Saugata Bhattacharya, chief economist at Axis Bank
In May, when COVID-19 had ravaged lives and livelihood in the Asian country, many were questioning if India still deserved its ‘investment grade’ status.
During that time, a spate of economists and ratings agencies had downgraded their growth outlook for India.
But now many economists and the government point towards higher tax collections, strong power consumption and record growth in exports as signs of economic revival, which may get India close to its economic growth target of 10.5 per cent in the current fiscal year.
India's economy grew 20.1 per cent during the April-June period, versus a 24.4 per cent contraction during the same period last year.
"For investors the big roadblock to bet on India is gone. I expect more long term foreign capital into India," said N.R. Bhanumurthy, vice-chancellor of Bengaluru Ambedkar School of Economics University.
Moody's also said it expects the better economic environment will allow for a gradual reduction of the general government fiscal deficit over the next few years, preventing further deterioration of the country's sovereign credit profile.
India is currently aiming to reduce its fiscal deficit to 6.8 per cent from 9.3 per cent last year.