The change could affect India's long-term rating of BBB-, which is the lowest investment grade rating.

S&P said in its statement: "We expect only modest progress in fiscal and public sector reforms, given the political cycle - with the next elections to be held by May 2014 - and the current political gridlock.

Such reforms include reducing fuel and fertiliser subsidies, introducing a nationwide goods and services tax and easing of restrictions on foreign ownership of various sectors such as banking, insurance and retail sectors."

Reacting to the statement, Singapore-based CLSA economist Rajeev Malik told Reuters: "It's clearly a negative development, and as to the extent of the impact, it depends on the global risk appetite. The constructive way to look at this is that the government should see this as a wake-up call and address these issues. We know all the problems, we know the solutions."