The rating agency said that it revised India's rating from earlier 'BBB-', as it expected the government to keep its fiscal consolidation targets.
The S&P said: "The outlook indicates government can implement fiscal and economic reform. Rating outlook revision shows improved political setting."
"Political setting offers conducive environment for reforms. Government reform pick-up may let RBI (Reserve Bank) draft effective policy."
However, S&P cautioned that it can lower the rating if the government's structural reform agenda stalls or economic growth does not accelerates.
Finance Minister Arun Jaitley is sticking to the target of fiscal consolidation under which he aims to bring it down to 3.6 percent of GDP by 2015-16.
Recent data showed that India's economy expanded at its fastest pace in more than two years. The economy grew by 5.7 percent in the April-June quarter from 4.6 percent in the corresponding period last fiscal.
Other agencies like Moodys and Fitch too have rated India's outlook as stable. Moody's has assigned a 'Baa3' rating with a stable outlook.
While Fitch has asserted India's outlook as 'BBB-' with stable outlook.
Indian equities markets reacted positively to the rating upgrade. The benchmark index of Indian equities market gained 158 points or 0.60 percent.
The 30-scrip Sensitive Index (Sensex) of the S&P Bombay Stock Exchange (BSE), which opened at 26,429.30 points, closed at 26,626.32 points, up 157.96 points or 0.60 percent from the previous day's close at 26,468.36 points.
The Sensex touched a high of 26,721.03 points and a low of 26,220.49 points in the intra-day.
The S&P bank index of the BSE gained 334.79 points, followed by metal index which was higher by 283.32 points, capital goods index rose 221.11 points, healthcare index was up 193.06 points and automobile index increased by 151.07 points.
Industry body Confederation of Indian Industry (CII) welcomed S&’'s upgrade and said that this will improve investor confidence and improve companies' access to international funds.
"The outlook revision was based on the strong mandate received by the new government, which has enabled it to implement policies that will revive growth and boost investments."
CII added that expected the economic recovery and reining in of fiscal deficits measures will encourage other rating agencies to upgrade India's outlook.
"CII is certain that the government's determination to move swiftly on areas like GST (goods and services tax), containing inflation in food products and achieving a sustained reduction in the fiscal deficit would further help this cause."