For the first time since 2004 Moody’s Investors Service on Wednesday upgraded India’s government bond ratings, bringing cheers to the market and businesses that had been reeling under a spate of bad economic news.

The international rating agency upgraded government bonds from ‘speculative’ to ‘investment’ grade. The upgrade is expected to encourage investment inflows from foreign institutional investors into the Indian debt market.

Captains of Indian industry were, however, not sure if the upgrade would immediately help ease India Inc’s bid to raise funds overseas. But that was mainly because of uncertain global market conditions.

The finance ministry saw the upgrade by Moody’s as significant in the present global context of uncertain economic environment. Since April 2011 as many as 15 sovereigns have been downgraded, a few of them more than once, including Japan, Belgium, Italy, Spain, Hungary and Egypt.

Recently, Moody’s downgraded a number of institutions and banks, including SBI and other public sector banks in India. A fortnight ago, a few French banks were downgraded by one notch and were further assigned a negative outlook. Last Friday, Belgium’s local and foreign currency ratings were downgraded by two notches.

In its review for India, Moody’s upgraded the rating on long-term government bonds denominated in rupees from ‘speculative’ to ‘investment’ grade (from Ba1 to Baa3). The long-term country ceiling on the foreign currency bank deposits too was upgraded from ‘speculative’ to ‘investment’ grade (Ba1 to Baa3).

In addition, Moody’s also upgraded short-term government bonds denominated in rupees from ‘speculative’ to ‘investment’ grade (from NP to P-3). This short-term rating was upgraded for the first time since it was introduced in 1998.

Finance ministry officials expected the upgrade by Moody’s to also have a positive impact on the value of the rupee against the dollar.

In this context, an official cited the observations made by Moody’s in its latest rating report. Taking note of the depreciation of the rupee in the past three months, Moody’s said: “While global conditions may limit portfolio flows in the coming months, other debt and direct investment flows appear to have compensated for them somewhat thus far. Foreign exchange reserves have risen by about $4 billion since end December 2010.”

Moody’s also concluded that “in terms of economic size, diversity, growth as well as savings and investment rates, India is stronger than its Baa3 rated peers.” Further, India’s “official foreign exchange servers are ample enough to finance the deficit as well as external debt when external flows are volatile.”

Business leaders expected foreign investors to put in more money in government debt paper, boosting the rupee, after this upgrade.

However, they expected fund raising by Indian companies to remain a problem even though Moody’s reaffirmed India’s sovereign rating at Baa3, which is regarded as a much-needed lift to the sagging confidence in the Indian economy.

Deepak Parekh, HDFC chairman, said that with reserves of over $300 billion and GDP growth of 7.5 per cent, India was in a stable phase. “Just because growth has declined to some extent and inflation remains high at 9 per cent, does not mean the India growth story is over.” Parekh felt that India was in fact much better placed than Moody’s rating suggested.

Prabal Banerjee, chief financial officer of Adani Power, said the debt market upgrade would have two long-term benefits. First, the debt market conditions would improve with better liquidity as lot of positive long-term foreign investments would come into India and, second, it would impact the rupee rate, with the Indian currency expected to appreciate in three to four months.

“The only caution should be taken that the money that comes to India is not hot money but long-term investments with longer maturities by FIIs,” he said.

Seshagiri Rao, joint managing director of JSW Steel, pointed out that Moody’s upgrade came close on the heels of RBI’s decision to hike FII limits in infrastructure bonds to $25 billion, besides hiking the limit in government and corporate bonds. “The higher rating will bring in more money to the debt market and we will see more FII investments. One of the main reasons for upgrading government bonds is that India has lower debt compared to other countries,” he said.

HDFC’s Parekh said that as far as fund raising was concerned, it would continue to be a problem for Indian corporate houses. “European banks are overleveraged towards India, China and other economies in Asia. They want to sell Asian paper as they want to maintain their capital adequacy ratio, meet the Basel-III norms and shrink their balance sheet. So fund raising for Indian corporate will still remain a problem,” he said.

MS Unnikrishnan, MD & CEO of Thermax, said Moody’s new ratings were a positive sign. It was an indicator of the confidence of the global rating agencies on the future of the Indian business and economy. It would also give enough confidence to the international investing community to look at India as a safer destination for investment, he said.

(With inputs from Jharna Mazumdar, Vikas Srivastav and Micheal Gonsalves)