New Delhi: Credit rating company Moody’s Investors Service on Friday upgraded India’s sovereign rating by a notch in a ringing endorsement of the Narendra Modi government’s reforms policy.

Moody’s raised the rating from the lowest investment grade of Baa3 to Baa2, and changed the outlook from stable to positive. It’s the first upgrade of India’s rating in 14 years.

Backing the reforms initiated by the government in the last three years, Moody’s said in a statement, “The decision to upgrade the ratings is underpinned by Moody’s expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential."

Popularly known as Modinomics, the economic policies, some of which like the demonetisation of high-value banknotes have caused disruption to the informal economy, have received flak from the political opposition, especially in the campaign underway for the Gujarat elections next month.

Not only will the Moody’s ratings upgrade deflect this criticism, it is likely to unleash a fresh round of foreign portfolio investments and make external commercial borrowings cheaper. The ratings agency, after the sovereign upgrade, revised the ratings for corporate entities too.

“Many who had doubts about India’s reform process would now seriously introspect on their position," finance minister Arun Jaitley said in response to the upgrade.

Financial markets cheered the upgrade. The BSE Sensex ended at 33,342.80 points, up 235.98 or 0.71%, while the Nifty closed at 10,283.60, up 68.85 or 0.67%. The rupee closed at 65.02 per dollar, up 0.47% from its previous close.

Bond prices, which move in opposition direction to yields, erased all the gains and closed little changed. The 10-year bond yield slid 13 basis points, its steepest fall since 16 May, before closing flat at 7.05%.

“It is reaffirmation of how the world views India," State Bank of India chairman Rajnish Kumar said. “The economic reforms programme which the government has initiated—after a period of pain, the results have started showing. The government’s fiscal prudence itself gets a thumbs-up, apart from the far-reaching reforms which we have seen in the banking sector—the bank recapitalisation programme, the adoption of the Insolvency and Bankruptcy Code, the GST (goods and services tax) reform."

Moody’s warned that India’s rating could be downgraded if its fiscal metrics and the outlook for general government fiscal consolidation deteriorates materially. “The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply," it said.

Finance secretary Hasmukh Adhia tweeted, “The path that Government has chosen for long-term reforms and fiscal consolidation is well recognised by investors already. The rating agency too has now confirmed it formally, which is welcome."

2/3 The path that Government has chosen for long term reforms and fiscal consolidation is well recognised by investors already. — Dr Hasmukh Adhia (@adhia03) November 17, 2017

The rating upgrade for India came months after Standard and Poor’s (S&P) Moody’s lowered China’s sovereign rating, citing risks from soaring debt.

The upgrade came after Moody’s said the Indian government was midway through a wide-ranging programme of economic and institutional reforms such as the recently-introduced GST that removed barriers to inter-state trade.

“While a number of important reforms remain at the design phase, Moody’s believes that those implemented to date will advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth," it added.

Among other things, it acknowledged improvements to the monetary policy framework and measures to address the overhang of non-performing assets (NPAs) in the banking system.

“Other important measures which have yet to reach fruition include planned land and labour market reforms, which rely to a great extent on cooperation with and between the States," it said.

Alekh Archana and Nasrin Sultana contributed to this story.

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