"The country's balance of payments remained resilient through the recent Asian/Russian crises, as well as through the international sanctions that were imposed following India's May 1998 nuclear tests," Moody's said. In addition, the external debt maturity structure improved and foreign reserves strengthened in recent years, reducing the country's vulnerability to external shocks.

In a related development, Duff & Phelps Credit Rating Agency (DCR), another US based agency, on Thursday said the stability of the new Indian government is vital for sovereign ratings of the country. DCR currently rates India's foreign and local currency obligations `BB+' and `BBB' respectively.

"A strong government, able to accelerate economic reforms and reign in the fiscal deficit, would support India's sovereign ratings. On the other hand, failure to implement the reforms could be negative for the country's ratings," DCR said.

Reacting to the change in Moody's India outlok, finance minister Yashwant Sinha said the change recognised the "inherent strength of the Indian economy". "I am happy that Moody's have reconised the inherent strength of the Indian economy and the recent improvement in it," Sinha told Reuters.

In response to a question on how of the outlook revision would affect foreign investment in India, Sinha said, "India is a favoured destination and this upward revision will certainly help in strengthening that conviction."

According to Moody's, a stronger consensus has emerged across the political spectrum concerning the necessity for structural economic reform. "The new government that emerges from the latest election is likely to stay in office longer than its recent predecessors, which would enable it to undertake a more aggressive economic restructuring during its term of office," Moody's said. Indian business confidence now seems less affected by political instability than in previous years, it pointed out.

The global rating agency, however, cautioned that the structural weaknesses of the economy -- chronic fiscal imbalances, public sector inefficiency, infrastructure shortages, and low productivity -- remain profound constraints on India's ratings.

"Inflation has been artificially subdued this year because of the delay in raising administered prices. As a consequence, a backlash could ensue when adjustments are taken to reduce the burden of subsidies on the budget," Moody's said, adding that over the next 18-24 months, the rating agency will closely monitor the new government's ability to develop a coherent, growth-oriented macroeconomic framework without succumbing again to narrow political schisms.

An earlier S&P comparision on investment possiblities in India and China and the risks that the US investors need to consider before taking a decision to invest in these countries had indicated that India's financial sector is much secure than that of China.

"Capital-account controls have largely insulated both India and China from destabilising capital outflows. While other economies contracted in 1998, the two Asian giants continued to grow, largely on momentum released by earlier rounds of economic reforms and higher public sector spending," S&P said.

A DCR release said: "India's ratings and stable outlook reflected the country's relatively strong forex reserve position and favourable external debt structure." The rating agency, however, felt that the government will not be able to acheive a fiscal deficit target of 4.4 per cent of GDP by 1999-2000. "Flexilibility in India's public finances was extremely limited due to high government debt burden," it said.