After a gap of 13 years, US-based global rating agency Moody’s has upgraded India’s sovereign credit rating by a notch to ‘Baa2’ with a stable outlook, citing improved growth prospects driven by economic and institutional reforms.

Moody’s Investors Service upgraded the Government of India’s local and foreign currency issuer ratings to ‘Baa2’ from ‘Baa3’ and changed the outlook on the rating to stable from positive. It had last upgraded India’s rating to ‘Baa3’ in 2004. ‘Baa3’ is the lowest investment grade – just a notch above ‘junk’ status.

The rating agency said the government is mid-way through a wide-ranging program of economic and institutional reforms and it will foster sustainable growth. It felt this will over time enhance India’s high growth potential and its large and stable financing base for government debt, “and will likely contribute to a gradual decline in the general government debt burden over the medium term”.

Moody’s stated that indirect tax reforms like Goods and Services Tax will promote productivity by removing barriers to interstate trade. It also felt the recent demonetization of high value currency, Aadhaar system of biometric accounts, and targeted delivery of benefits through the direct benefit transfer will reduce informality in the economy.

The global ratings agency, however, cautioned that high debt burden remains a constraint on the country’s credit profile. But it felt the reforms put in place have reduced the risk of a sharp increase in debt, “even in potential downside scenarios”.