Global investors, the biggest driver of Indian shares, should feel encouraged to plonk more cash into the subcontinent after Standard & Poor’s upgraded the country’s outlook rating, acknowledging the promise that Prime Minister Narendra Modi offers to nurse back the economy and revive investment.

The rating agency, which had cut India’s credit rating outlook to negative in April 2012 — to the brink of junk status, on Friday raised the outlook to “stable” but maintained its BBB- rating, the lowest investment grade, and indicated it could raise the rating if economic growth picks up momentum and fiscal, external or inflation situation improves.

“The stable outlook for the next 24 months reflects our view that the new government has both the willingness and capacity to implement reforms necessary to restore some of India’s lost growth potential, consolidate its fiscal accounts, and permit the Reserve Bank of India to carry out effective monetary policy,” S&P said in a statement.

The immediate impact of the rating improvement would be lower borrowing cost for companies, and a leg up for foreign inflows. Subdued global oil prices, lower subsidy bill and improving revenue collections should help the government achieve its fiscal deficit target of 4.1 per cent for the current financial year that ends next March.

In the quarter ended in June, India’s nearly $2 trillion (Dh7.34 trillion) economy notched its quickest growth in two-and-a-half years, accelerating to 5.7 per cent and many economists expect full-year growth to top 6 per cent or more.

Although there is a long way to for the next rating upgrade, which would need more concrete measures and stronger growth, the move by the conservative S&P should nevertheless provide another impetus to the feel-good sentiment that has drawn foreign investors in droves since the Modi administration took over in May.

There were signs of fatigue among investors after the stock market rallied 28 per cent since the close of 2013, and a Supreme Court ruling this week declaring most coal mine allocations since 1993 as illegal, putting at risk millions of dollars in private-sector investment, had triggered a sell-off and cast a shadow on the outlook.

The top-30 Sensex snapped a three-day slide on Friday after the S&P move, but still ended the week down 1.7 per cent at 26,626.32. The 50-share Nifty shed 1.9 per cent on the week to 7,968.85.

Modi in US

The spotlight in the coming week will be on the prime minister’s tête-à-tête with US President Barack Obama in Washington and about how successful he would be in attracting US investment in India, particularly in sectors such as defence, infrastructure and high-technology.

Modi, who won a stunning victory in national elections on the promise of development, is pushing for a strategist shift to make India a manufacturing base for global companies. In this regard, he kicked off a “Make in India” campaign this week, aiming to boost the manufacturing sector’s contribution to a quarter of GDP from 15 per cent in 2013-14. One of the key initiatives is to have a single-window would assist prospective foreign investors through the entire investment cycle.

“These broad initiatives blend with the government’s overall plans to build investor confidence through better governance and a conducive business climate,” Singapore-based economist Radhika Rao at DBS Bank said in a note.

“While material changes to the manufacturing cycle are likely to be only visible beyond 2014-15, we expect the initial boost through project clearances and rebuilding of stocks to lift growth towards 6 per cent this year and the next. Lagged boost to consumption spending should also help boost growth in later part of this year and into 2015-16,” she said.

Calling the campaign as a step in the right direction, Sonal Varma and Aman Mohunta at Nomura Securities said in report: “It will have to be followed up by more tangible measures such as building ports, highways, increasing power generation and so on, to make India a manufacturing hub.”

Modi, who is scheduled to speak at the UN General Assembly on Saturday, is set to receive a rock-star welcome at the iconic Madison Square Garden in New York on Sunday from the prosperous Indian diaspora, and he will be meeting 17 US chief executives of companies such as Boeing, Goldman Sachs, General Electric, IBM and Google.

While seeking support for his vision to upgrade India’s creaking infrastructure, Modi will hammer home the country’s technological prowess — which is rarely acknowledged — by pointing out the successful space mission to Mars achieved this week.

Rates seen on hold

The Reserve Bank of India is expected to keep interest rates unchanged at its monetary policy meeting on Tuesday, underscoring lingering price pressures.

Consumer price inflation slowed to 7.80 per cent in August from 7.96 per cent in July, but escalating food prices pose a threat and Governor Raghuram Rajan is clearly focused on fighting inflation rather than kowtowing to New Delhi’s subtle hints to loosen policy to help growth.

“The real problem is that inflation is persistent,” Rajan told a gathering this week. “We have been emphasising again and again, in order to break the back of inflation we have got to break this persistence. Once we do it we can be much more comfortable.”

The central bank main policy rate, the repo rate, currently is 8 per cent and many economists believe the earliest chance for a cut would likely be in 2015, probably in the second quarter.

“Though controlling inflation remains the RBI’s main concern, the monetary policy stewards cannot altogether ignore signs of a growth slowdown,” Sujan Hajra and Moumita Paul Samanta at Anand Rathi Shares and Stock Brokers Limited wrote in a note, adding that they expected to no change in rates on Tuesday.

“There has been a significant drop in demand for interest-sensitive products such as consumer durables. India’s export growth has also been decelerating for the past few months.”

Sluggish demand for loans portends to speed bumps in the path of economic growth. Credit growth continues to slow and at 10.9 per cent annual rise is nearing decade lows, according to analysts at JP Morgan.

“Analysis of sectoral credit growth trends indicates that the slowdown is led by industrial demand, particularly from large corporates. Growth in personal loans and priority sectors have held up on a relative basis,” Bijay Kumar and Adrian Mowat at the US investment bank said in a report.

“These trends suggest that there is a healthy improvement in consumer sentiment, but investment sentiment is yet to pick up in a meaningful manner. The ability of large corporates to borrow is also likely being inhibited by the high existing leverage and risk aversion by banks.”

The writer is a journalist based in India.