India credit rating is raised by S&P

In a move that will only increase the already considerable interest in the Indian economy, Standard and Poor's yesterday raised the country's credit rating to investment grade for the first time in 14 years. The move is an acknowledgement that India has arrived on the global economic stage - and comes at a time when British investors are seriously keen to get a foothold in India.

In one major acquisition battle, Vodafone and the Hinduja brothers are among several foreign investors vying to buy a stake in Hutchison Essar, the country's fourth largest mobile phone network.

And when Gordon Brown visited India this month, the headlines may have been grabbed by the alleged racism on Big Brother, but behind the scenes the Chancellor had serious business on his agenda: lobbying the Indian government to drop restrictions on foreign investment so that British companies can get more access to the Indian economy.

Standard and Poor's is the last of the three major international ratings agencies to raise India to investment grade. It raised its rating for India from BB+ to BBB-, technically, a raise of only one level, but one which crosses the crucial threshold to investment grade.

"This is very positive news for India and for the rupee," Callum Henderson, currency strategist at Standard Chartered Bank in Singapore, said.

In practical terms, it means large institutional investors will be able to buy Indian bonds - they only buy bonds from countries with investment grade ratings from all three agencies. On top of that, it will increase confidence among corporate investors.

India's economy is expected to grow at a record 9 per cent this year - a rate only bettered by China. And Standard and Poor's credit analyst, Pew Ching, predicted Indian GDP would continue to grow at 7.5 per cent in the medium term, all of which is music to investors' ears.

Mr Ching also pointed to India's huge foreign exchange reserves of $176bn, the seventh largest in the world, which could pay off its short-term debt 16 times over.

But some analysts said that the improved rating was just catching up to a reality that has been around for a while. "To say that India is investment grade is to be behind the curve," Desmond Soon of Pacific Asset Management told reporters.

"I am happy," the Indian Finance Minister, P Chidambaram said. "It's an acknowledgment of India's improving macroeconomic stability and strength." The new rating is a vindication for the Indian government. When the traditionally left-leaning Congress Party swept to power unexpectedly in 2004, there were concerns in some quarters it could slow the furious pace of growth that had flourished under the right-wing Bharatatiya Janata Party (BJP). Instead the Indian economy has grown even faster under Congress.

In a sign of the current strength of the economy, India's largest bank, ICICI, this month sold a massive $2bn of bonds overseas to raise funds to meet domestic demand for lending.

But Standard and Poor's pointed to the country's sizeable fiscal as one reason for caution. "The ratings on India remain constrained by the weak fiscal profile, especially its high government debt burden and deficit," it said. "Further rating improvements will depend on sustained prudent fiscal policy that leads to a decline in government debt and interest burden."

Impressive as India's economic growth is, it is being driven by only a small proportion of the vast population of 1.1 billion people - and the country still has to deal with a huge population of poor. Only 30 million of its people pay taxes, and food and fertiliser subsidies account for almost a tenth of the $120bn budget.