"In order for us to proceed to an actual review for upgrade, however, we will need to be convinced that the reforms that have been promised will be implemented in a comprehensive fashion," Moody's said in its latest issue of `credit perspective'. Moody's also said it would closely monitor deterioration in relations between India and Pakistan, since the heightened hostilities represented an additional threat to political and economic stability.

On reforms, the report said that Moody's would examine whether India takes decisive steps towards fiscal adjustments, such as privatising some of the large public sector units and banks. "Accordingly, we will pay close attention to the budget that the Vajpayee Government would announce late in February,"Moody's said.

The rating agency, which raised India's outlook from stable to positive in October last year said, the enhanced rating outlook was motivated by improved prospects for fundamental economic reforms.According to the report, credit quality trends had already shown signs of improvement outside the US, as ratings of 11 sovereigns were raised and four lowered last year. In 1998, sovereign rating downgrades were 28 as compared to nine upgrades.

As for corporate and financial borrowers, rating upgrades were 255 while downgrades were 285 in the last year. This was a marked improvement from 1998's performance when downgrades of non-US entities swamped upgrades by 699 to 107. The report said that credit strengths would likely be bolstered in 2000. In Asia, the turnaround in credit quality was even more striking, Moody's said.

Rating upgrades led downgrades by 54 to 28 in the region last year as compared to 1998 when upgrades were nil and downgrades numbered 254.In the case of Japan, the country had 12upgrades and 79 downgrades in 1999, continuing the negative trend of 1998, the report stated.

The agency felt that there would be a complete rebound in the prices of products.

Moody's said given the recent track record, the new budget should not only be ambitious, but realistic based on truly achievable results of concrete adjustments.

It said in spite of fiscal shortfalls, economic policy momentum had been established in recent months with measures such as opening insurance industry to foreign participants, agreements with state governments to institute Union value added tax rates and brand new trade accord with the us.