Global ratings firm, Standard & Poor’s on Thursday raised the outlook on India to

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stable from negative, a move that would make borrowing a little cheaper for Indian companies overseas and possibly lead to more flows from foreign institutional investors (FIIs).

S&P has affirmed the ‘BBB-’ long-term and ‘A-3’ short-term sovereign credit ratings on India.

The ratings agency said the revision in outlook reflects its view that India’s financial position could now begin to recover and its economy will remain on a strong growth path. The government budget targets a general government (including central and state governments) deficit of 8.3 per cent in 2010-11, from 9.8 per cent in the ongoing year.

Abheek Barua, chief economist with HDFC Bank, said, “The spreads will come down further for overseas borrowings and portfolio flows — which are not directly linked to the rating, would also see some improvement.”

S&P’s credit analyst, Takahira Ogawa, said, “We expect India’s GDP growth to be eight per cent in 2010-11, which is higher than many other countries and exceeds our expectations. We expect the country’s ratio of gross external financing need to currency account receipts plus international reserves to remain stable at 77 per cent in 2009-10.

It also said India’s ratings could be raised if the government continues to reduce the public sector’s deficits materially. Conversely, if the government continues with its loose financial policy or there are policy setbacks on monetary, financial and economic fronts that lower the country’s medium-term growth prospects, this could result in a downpressure on the ratings.

Rohibi Malkani, economist with Citi India, said, “We believe this move is encouraging and bodes well for the rupee as well as FII inflows. We expect further rating action given positive steps towards financial consolidation, the likelihood of implementation of GST later this year and India’s favourable growth and external sector dynamics.”

On Thursday, the key benchmark indices scaled two-month closing highs after S&P revised India's rating outlook. The BSE 30-share Sensex rose 29.18 points, up 101.65 points from the day’s low.

Most market participants Financial Chronicle spoke to are confident that the upgrade will boost FII inflow into the country.

“Long-only funds will feel more encouraged to invest in Indian market due to stable outlook for the country,” said Deven Choksey, managing director of Mumbai-based KR Choksey Shares and Securities.

“Because of S&P’s change in outlook for India, the confidence of FIIs will increase. This will boost the liquidity in the Indian stock market,” said Dinesh Thakkar, chairman and managing director of Angel Broking.