Moody's also upgraded the rating of Hindustan Petroleum Corporation's (HPCL), a state-run oil marketing company, along with that for Bharat Petroleum and Indian Oil Corporation, to Baa2 from Baa3 with a stable outlook. Government officials expressed hope that other credit rating agencies such as S&P and Fitch would follow suit.
The "Baa3" rating was the lowest investment grade - just a notch above "junk" status.
Finance Minister Arun Jaitley told reporters Moody's decision was a "belated recognition" of the steps the government has taken to fix India's $2 trillion economy.
Ranen Banerjee, partner - public finance and economics, PwC India, saw the enhancement of India's rating as "global confidence on the ability and intent of the government to adhere to the fiscal consolidation roadmap of narrowing the fiscal deficit and paring the debt stock".
"On the fiscal front, efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility", said the Moody's report.
"After a gap of 13 years, global rating agency Moody's on Friday upgraded India's sovereign credit rating from its lowest investment grade to Baa2 and gave a thumbs up to two big-ticket reforms - demonetisation and GST â€" calling them remarkable.
This is India's first rating upgrade since 2004, when it was upgraded to Baa3 from Ba1. "Entire world is recognising "Sabka Saath, Sabka Vikas" Railways and Coal Minister Piyush Goyal said in a tweet.
Hailing the decision, he said that the government has become extremely encouraged over the upgraded rating.
In a statement, it further said: "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".
Just before the Moody's upgrade happened, yields on 10-year government bonds had gone up from 6.46 to 7.06 per cent in the last four months, with the rupee also losing over 90 paise to the dollar. Moody's counted the GST, measures to address non-performing loans in the banking system, demonetisation, Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) as key reforms undertaken by the Modi government. The markets cheered the move.
"Challenges with implementation of the GST, ongoing weakness of private sector investment, slow progress with resolution of banking sector asset quality issues, and lack of progress with land and labour reforms highlight still material government effectiveness issues", it said.
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