In a move that could again attract Foreign Institutional Investors (FIIs) to the Indian bond market and boost the gloomy economic outlook, the global rating agency Moody's on Wednesday upgraded the credit rating of the Indian government's bonds from the speculative to investment grade. This could help companies raise funds abroad at competitive rates.

According to a release issued by the Finance Ministry, Moody's unified India's local and foreign currency bond ratings at Baa3.

“The credit rating incorporates the … strengths such as a large, diversified economy, robust medium-term growth prospects and a strong domestic savings pool that facilitates the financing and refinancing of the government's relatively high debt burden,” the rating agency, Investors Services, said in a statement.

India's foreign currency bond ceiling is unchanged at Baa2, and the foreign currency bank deposit ceiling is Baa3. The local currency bond and bank deposit ceilings are unified at A1. In addition, the government's local currency short-term rating has been changed to P-3 from NP, indicating the government's ability to repay short-term debts.

Moody's said it expected India's growth downturn to persist for the next two quarters, but the GDP growth would be above average with respect to the similarly rated peers.

The Finance Ministry release said Moody's had upgraded the rating on long-term government bonds denominated in domestic currency from Ba1 to Baa3.

Giving the rationale for the upgrade, Moody's said: “Diverse sources of Indian growth have enhanced its resilience to global shocks. The present slowdown could reverse some time in 2012-13, as inflation cools from the current 9 per cent levels.”

Thomas Mathew, Joint Secretary, Capital Markets Division of the Department of Economic Affairs (DEA), said this would encourage FII to look at India as a favourable investment destination.

The last time Moody's upgraded any Indian long-term sovereign debt instrument from the speculative to investment grade was in 2004.

The present upgrade follows a meeting between representatives of the rating agency and Finance Ministry officials last month.

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