Foreign brokerages expect upgrade in India's credit outlook

Barclays said the key risk to the rating will be oil price hike, reduction in the political will to carry out the necessary reforms and domestic security risks.

BofA-ML said meanwhile that "with Moody's downgrading their Brazil outlook last night, key emerging market peers are seeing downgrades", but added that "we expect rating agencies to upgrade their outlook for India. We see three compelling reasons to expect at least an outlook upgrade for India".

It said the prime drivers for an upgrade in the outlook would be: growth is bottoming out and there is an expected rebound to the 8 percent level by 2018; inflation is peaking and expected to reduce, and a reduction in the fiscal as well as current account deficits.

At least two of the international credit rating agencies, led by S&P, have expressed concerns about country's sovereign rating since 2012. They raised issues of sagging growth, high inflation, high fiscal deficit and also a sense of 'policy paralysis' which had its roots in a perceived lack of decision making by the previous UPA regime.

S&P has a 'BBB-' rating with a negative outlook on the country. 'BBB-' is the lowest investment grade and a downgrade would mean pushing the country's sovereign rating to junk status, making overseas borrowings by corporates costlier.

BofA-ML said: "We thought the S&P downgrade of the BBB- outlook to negative from stable in April 2012 unwarranted."

The government has been meeting representatives of the rating agencies for over a month, trying to impress upon them positives in the economy. Moody's has assigned 'Baa3' rating on India, with a stable outlook, which suggests a possibility of an upgrade.

Fitch has affirmed India's long-term foreign and local currency issuer default rating at 'BBB-' with stable outlook.

Finance Secretary Arvind Mayaram had met representatives of the Moody's earlier this week.

"We presented our case. The budget has strong growth impulses and response of the economy is positive. They have concerns about fiscal deficit. We explained that we will be able to maintain target," he told reporters after the meeting.

The government has affirmed a commitment to stick to the 4.1 percent fiscal deficit target for the current fiscal and bring it down gradually to 3 percent by FY17.