India's credit rating outlook was raised to positive by Moody's Investors Service, signaling optimism in the efforts of Prime Minister Narendra Modi and central bank chief Raghuram Rajan to improve Asia's No 3 economy.

The country's Baa3 rating was affirmed and the outlook was revised from stable, Moody's said in a statement on Thursday in Singapore. India is rated the lowest investment grade, on par with Indonesia, Iceland and Turkey.

"There is an increasing probability that actions by policymakers will enhance the country's economic strength and, in turn, the sovereign's financial strength over coming years," Moody's said. "India has grown faster than similarly rated peers over the last decade due to favorable demographics, economic diversity, as well as high savings and investment rates."

While recent government recalculations of gross domestic product have blurred assessments of how the economy is faring and perplexed Rajan, foreign funds have poured more into Indian stocks and bonds in 2015 after a record $42 billion in 2014, and the benchmark S&P BSE Sensex index has risen more than 25 percent in the past year. Policymakers are putting in place the right measures to address inflation and increase investment, Moody's said.

"It's an endorsement of both Modi and Rajan," said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. India's growth and rating outlook have "benefited from the kind of confidence that Governor Rajan built in the rupee and in inflation anchoring, as well as what the Modi administration's doing in terms of the fiscal steps they've taken."

Upgrade potential

An increase in the investment rate and the government's ability to keep inflation under check will be key to a sovereign ratings upgrade, Atsi Sheth, senior vice-president for sovereign risk at Moody's, told Bloomberg TV. An improvement in the country's banking system will also influence the decision, she said.

"The outlook horizon is 12 to 18 months and our outlook is forward looking that we are expecting some of these positive things to happen," Sheth said. Any ratings upgrade by Moody's would be the first for India since 2011, according to data compiled by Bloomberg.

The yield on India's 10-year sovereign bond fell 1 basis point to 7.78 percent as of 9:54 am in Mumbai, the rupee was little changed at 62.2625 a dollar and the benchmark stock index fell 0.2 percent.

Inflation target

India's central bank left interest rates unchanged this week after unscheduled cuts that put India in the group of almost 30 central banks easing monetary policy this year. Rajan's pause reflects a desire to ensure inflation stays below a target of 6 percent by January.

Official data show conflicting signs that growth is taking off even as the government forecasts a 7.4 percent expansion in the last fiscal year, matching China as the world's fastest growing major economy. While company earnings are bottoming out and car sales are picking up, February exports fell the most since 2009 and credit growth is at the lowest in more than five years.

Private investment as a percentage of GDP has fallen by more than 8 percentage points over the five years through March 2013 while public investment has dipped 1 percentage point, the finance ministry said in its latest economic survey.

(China Daily 04/10/2015 page17)