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Mumbai, Aug. 23: Global rating agency Standard & Poor's (S&P) today revised its outlook on India's long-term foreign currency rating to positive from stable.

The agency, however, warned that the local currency rating could be lowered if fiscal deficit remains unwieldy and internal debt continues to rise.

“The revision reflects India’s improving external liquidity and better prospects of the government’s debt burden stabilising,” S&P said.

“India’s robust foreign exchange reserves mitigate the risk of volatility in external confidence,” said S&P credit analyst Ping Chew.

The outlook on the BB+ long-term local currency rating was revised to stable from negative. All ratings on India (foreign currency BB/Positive/B, local currency BB+/Stable/B) were affirmed.

S&P said the sovereign ratings are supported by the country's good economic prospects, with the strong likelihood of a GDP growth of more than 6 per cent in the medium term.

The agency added that the service sector is dynamic, while the industrial sector is benefiting from gradual deregulation, trade liberalisation, and modest improvements in infrastructure.

“Good economic growth could contain the pressure on India's already weak public finances, provided tax reforms continue,” Chew said.

India's external debt and debt-service burden is expected to fall due to a strong export growth and non-debt foreign capital inflows. This should help offset the impact of rising imports, given the surge in oil prices, the agency said.

However, the sovereign ratings remain constrained by high public debt and fiscal inflexibility. “The country’s fiscal weakness is the worst among nations with a sovereign rating. It is vulnerable to economic cycles and declines in growth rates,” Chew said.

Positive signal

Standard & Poor’s revision is being seen as a positive signal for the economy, especially equity markets. The markets could not react as they were preoccupied with the impact of lower steel prices. However, analysts feel the upgrade may result in a rise in FII inflows.