(Bloomberg) -- S&P Global Ratings signaled a likely upgrade in India’s sovereign credit rating in coming months, giving a boost to Prime Minister Narendra Modi’s government less than a week before election results are released.

S&P raised its outlook on India’s BBB- rating — the lowest investment grade level — to positive from stable, citing the economy’s strong fundamentals that will support growth in the next two to three years. 

“Regardless of the election outcome, we expect broad continuity in economic reforms and fiscal policies,” S&P said in a statement Wednesday. “The positive outlook reflects our view that continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects.”  

Bonds gained on the news, with the yield on the benchmark 10-year note falling as much as three basis points to 6.99%. The rupee and stocks held losses.

“It’s a positive development, but it may be some time before the actual rating upgrade takes place,” said Puneet Pal, head of fixed income at PGIM India Mutual Fund. “There’s not much impact immediately, but it buttresses the already strong macro narrative for India, and hence a positive over time.”

Modi, who is expected to win a third consecutive term in office, has ramped up infrastructure spending in the economy, driving up growth close to 8%, making India the fastest-growing major economy in the world. Bloomberg Economics estimates India will spend 44.4 trillion rupees ($534 billion) on building new infrastructure over the next two years, which will help lift economic growth to 9% by 2030. 

At the same time, the government has been reining in its fiscal deficit from a high of 9.2% of gross domestic product three years ago, reducing its debt burden and borrowing needs. Finance Minister Nirmala Sitharaman has pledged to bring the deficit down to 4.5% by 2025-26 from an estimated 5.1% this fiscal year.

S&P’s move comes ahead of India’s inclusion in JPMorgan Chase & Co.’s emerging-market bond index next month, which is expected to attract foreign inflows of about $20 billion-$25 billion over the 10 months to March. Other providers are also expected to add India to their indexes over the next year, giving a boost to India’s foreign-exchange reserves and providing a stronger buffer against external risks.

Read: India Sees Reserves as Main Tool to Manage Bond Index Flows

The government is also getting a revenue boost from a surprise record 2.11 trillion rupees dividend transfer from the central bank, helping drive down the fiscal deficit further, said Siddharth Kothari, an economist at Sunidhi Securities & Finance Ltd. 

S&P said India’s cautious fiscal and monetary policies reduce the government’s “elevated debt and interest burden while bolstering economic resilience,” which could lead to a higher credit rating over the next 24 months.

Gaurav Kapur, chief economist of IndusInd Bank Ltd., said the move was an “acknowledgment of a broad-based improvement in macroeconomic stability,” such as external buffers, improvement in government finances, stable inflation and favorable growth.

“An actual rating upgrade is likely over the next 12-18 months especially if growth sustains and inflation eases toward the target allowing for reduction in public debt levels,” he said. 

Bloomberg Index Services Ltd. will also start including India in its emerging-markets index from January. Bloomberg LP is the parent company of Bloomberg Index Services, which administers indexes that compete with those from other providers.

--With assistance from Kartik Goyal.

(Updates with charts and context)

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