Is India close to a ratings upgrade?

Bloomberg | Getty Images

Standard & Poor's (S&P) revised its outlook on India's 'BBB-' sovereign credit rating to "stable" from "negative" on Friday, leading investors to question whether a ratings upgrade near.

The revision was backed by an improvement in India's external position and growth prospects and means it's no longer on the brink of a "junk" rating. S&P was the last of the three main global ratings agencies with a negative outlook on India; Moody's never changed India's outlook, while Fitch upgraded it to stable in 2013.

While the risk of a downgrade is now firmly off the table, a lot more needs to happen before India gets a ratings upgrade, Radhika Rao, economist at DBS told CNBC.

"Clarity is still required on the fiscal consolidation efforts, take-off pace of the reform agenda and sustained pick-up in growth in a controlled inflationary environment," she said.

"A ratings upgrade would be a 2016 story," she said.

S&P could raise the rating if the economy reverts to "a real per capita gross domestic product trend growth of 5.5 percent per year and fiscal, external, or inflation metrics improve," it said in a statement accompanying its outlook revision.

Read MoreOnce-banned Indian leader woos diaspora at giant New York rally

Conversely, S&P may lower the rating if the government's structural reform agenda stalls and economic growth doesn't accelerate or fiscal and debt ratios fail to improve, it said.

Not so fast

Green shoots suggest improvements in Asia's third-largest economy, but whether a full-blown recovery develops remains to be seen. The economy grew 5.7 percent on year in the June quarter, its quickest pace in two-and-a-half years.

Read MoreRBI rate cut? Don't hold your breath

India watchers expect Prime Minister Narendra Modi's stable government and proactive policy measures to strengthen macroeconomic fundamentals to help put the economy back on a high growth trajectory.

But Rajeev Malik, senior economist CLSA, Asia-Pacific Markets agrees a ratings upgrade is not on the cards anytime soon.

"S&P's move isn't telling you anything new, it's just echoing what investors have already acted upon," he said, citing the stellar performance of Indian equities.

Read MoreThe man who would remake India: A 90-day scorecard

India's Nifty index has rallied 37 percent over the past 12 months driven by a combination of factors including a turnaround in macroeconomic imbalances, rupee stability and sweeping election victory for the Bharatiya Janata Party (BJP) -led National Democratic Alliance (NDA).

"There is a possibility of an upgrade but first we have to see significant implementation of reforms as ratings agencies aren't prone to action on cyclical factors," he said.