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Citi expects S&P Global Ratings' to upgrade India's sovereign rating by late 2026 given the ratings agency's confidence in the South Asian nation's macro drivers as well as the flow of economic and political cycles, it said on Thursday.

S&P raised India's sovereign rating outlook to 'positive' from 'stable' on Wednesday, citing the country's strong economic fundamentals. It, however, kept the rating itself at 'BBB-'.

"In the past, S&P had a positive outlook on India in mid-2004 and mid-2006. In both instances, an actual rating upgrade happened within six months," Citi economists wrote in a note.

They expect an upgrade around late 2026 but said it could happen earlier if S&P felt confident about India's fiscal trajectory.

Citi said India's fiscal health was probably the "main weakness" in S&P's rating profile and an improvement would be the key to an upgrade.

India aims to narrow its fiscal deficit to 4.50% of gross domestic product by the end of 2025/26, from an expected 5.8% in 2023/24.

The discussion among market participants will now move from the possibility of a rating upgrade to the timing of one, Citi said.

That positive sentiment, it added, should help depress risk premium for Indian debt and alter external borrowing costs for corporates.

S&P's action, Citi said, reaffirmed its long-held view of the benchmark 10-year bond yield moving toward 6.50% by March 2025 from around 7% currently.

DBS reiterated Citi's view, stating the outlook revision coming close on the heels of the Reserve Bank of India's record high surplus transfer to the government added to the positive view for local debt.

S&P's move "leaves the door open for a rating upgrade within two years" depending on the general government deficit easing below 7% of GDP on a sustained basis and a further rise in public investment in infrastructure, DBS said in a note on Thursday.