Moody's upgrades India's sovereign credit rating: What does that mean??

The ratings agency Moody's upgraded India's sovereign credit rating from a BAA3 to a BAA2 on Friday.

The two-rung upgrade came after 13 years.

India was earlier upgraded to a BAA3 in 2004 -- the lowest investment grade.

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Moody's said Friday's upgrade came about because of the Modi government's economic and institutional reform.

It cited the Goods and Services Tax, which turns India's 29 states into a single customs entity.

The GST is expected to push up productivity by removing barriers to inter-state trade.

Moody's also cited Aadhar, which it is hoped will lead to more effective direct-benefit transfers.

So what will the upgrade bring about?

A credit rating is a barometer of a country's monetary and regulatory environment.

The higher a country's rating, the greater the investment in that country should be.

So, simple -- the upgrade should lead to greater FDI inflow into the country.

And greater FDI inflow should lead to a lowering of the cost of capital.

Which in turn should lead to higher growth, since easier access to capital allows companies to borrow and transact more, and therefore grow more.

The upgrade should also push up sentiment in equity markets, thereby pushing up the sensex.

Remember also that the upgrade comes just after ratings agencies Standard & Poor's and Moody's downgraded China's credit rating.

Which means that the money that left China after the downgrade could find its way to India.