S&P Outlook Upgrade Can Prompt More Hikes For India, Will Encourage FII Participation: Experts

India's macro indicators are better than all other emerging markets and it should not be compared with them in the context of ratings, according to Sanjeev Sanyal, member of the Economic Advisory Council of the Prime Minister.

Private-sector participation has increased in last year and every form of infrastructure spending has seen a big increase, Sanyal said.

Ratings agencies are a bit slow when evaluating emerging markets and India has been at the receiving end, Sabnavis said. "It's a very big step as they have acknowledged that fundamentally, (the) Indian economy is doing very well on all scores."

This outlook will be reflected in sentiment on an overall basis and more importantly, it only means reaffirmation that the economy fundamentals are strong, according to Dilip Bhat, director of Padigree Advisory Pvt.

The move will be a huge positive from the foreign-institutional-investor angle and the foreign-direct-investment angle, Bhat said. This was the need of the hour and would mean a lot to the FII investors because they have been set sellers, he said.

Even in terms of fiscal deficit, S&P said that if it comes to around 7%, there could be a change in the rating too. States have shown good performance on the deficit front and there is a strong enough reason to believe that the deficit target can be attained very soon, according to Sabnavis.

The upgrade by S&P reflects confidence on the whole set of reforms that the government has been pursuing in the last decade, according to Anubhuti Sahay, head of economic research at Standard Chartered Bank.

The quality of fiscal consolidation improved significantly and structural change of external funds primarily came on the doubling of services exports, Sahay said.

This is not only a boost to general sentiment but companies that borrow overseas will also benefit. It is much more likely that other rating agencies will follow suit. The change in ratings could also be happening in a year or two, Sabnavis said.

"Actions in the right direction can lead to structural decline in government debt-to-GDP can trigger them to go for a rating upgrade," Sahay said.

According to Mahesh Nandurkar, head research, MD, Jefferies India, this will help maintain the stability of rupee and also pull in more flows because the stable flows would mean that the rupee return would equalise the dollar returns.

"The other things to look at will be the index inclusion of India. I mean we have already seen two global agencies adding India into the emerging market of debt indices, that is already driving some kind of incremental flows onto the debt side," Nandurkar said.