The agency said it was lifting India’s rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India’s credit profile were broadly balanced.
Moody’s upgrade, its first since January 2004, moves India’s rating to the second lowest level of investment grade.
The upgrade is a shot in the arm for Prime Minister Narendra Modi’s government and the reforms it has pushed through, and it comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.
All Indian markets including stocks, bonds and rupee rallied on the ratings upgrade.
“It seems like Santa Claus has already opened his bag of goodies,” said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said.
“The move is overall positive for bonds which were caught in a negative spiral. This is a structural positive which would lead to easing in yields across tenors,” she said.
Last year, India lobbied hard with Moody’s for an upgrade, but failed. The agency raised doubts about the country’s debt levels and fragile banks, and declined to budge despite the government’s criticism of their rating methodology.
The government cheered the upgrade on Friday with Economic Affairs Secretary S. Garg telling reporters the rating upgrade was a recognition of economic reforms undertaken over three years.
Moody’s said the recently-introduced goods and services tax (GST), a landmark reform that turned India’s 29 states into a single customs union for the first time, will boost productivity by removing barriers to inter-state trade.
“In the meantime, while India’s high debt burden remains a constraint on the country’s credit profile, Moody’s believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios,” the ratings agency said in a statement.
Still, some market participants questioned the timing of the move.
“The timing is little dicey for the upgrade given that there are lot of concerns over the government’s fiscal discipline,” said a foreign bank dealer, adding he did not expect other agencies to follow Moody’s.
Moody’s said it expects India’s real GDP growth to moderate to 6.7 percent in the fiscal year ending in March 2018 from 7.1 percent a year earlier.
The agency also raised India’s local currency senior unsecured debt rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.