Shares of the WisdomTree India Earnings Fund (EPI), the largest India ETF by assets, traded higher by 1.1 percent Tuesday after Moody's Investors Service reiterated a stable outlook on India's sovereign debt rating. Moody's also affirmed a Baa3 credit rating for India, which is one notch above non-investment grade status.

The news from Moody's could not come at a better time for India. Already home to the worst credit rating of the four BRIC nations, India is fighting to keep its investment-grade rating. The loss of that rating would lead to not only higher borrowing costs, but a probable plunge in major India ETFs such as EPI and the PowerShares India Portfolio (PIN).

The PowerShares India Portfolio and the iShares S&P India Nifty 50 Index Fund (INDY) are also trading higher on the Moody's news. PIN is up nearly 0.9 percent while INDY has gained 0.7 percent on volume that has already surpassed the daily average.

Moody's backing of the stable outlook and India's investment-grade status could serve to calm investor fears that the country's departure to junk territory is imminent. Still, it must be noted that earlier this year Standard & Poor's lowered its outlook on India to negative from stable. S&P rates India's debt BBB-, the lowest investment-grade rating on its scale. Fitch Ratings also has a BBB- rating with a negative outlook on India, Asia's third-largest economy.

"The sovereign rating is supported by credit strengths which include a large, diverse economy, strong GDP growth as well as savings, and investment rates that exceed emerging market averages," Moody's said in a report.

Conversely, the Moody's report was not entirely positive. The ratings agency criticized India's high government deficit and debt ratios, problems with inflation and decrepit infrastructure, among other issues.

India's infrastructure, arguably the worst of the BRIC nations and perhaps among the worst in the broader emerging markets universe, was negatively displayed earlier this when massive blackouts swept the nation, leaving as many as 600 million citizens without electricity.

Of the country-specific ETFs devoted to the infrastructure sub-sector, the EGShares India Infrastructure ETF (INXX) has outperformed the comparable Brazil and China funds by surprisingly wide margins this year. However, since those three ETFs debuted over two years ago, INXX is by far the worst performer with a loss of nearly 31 percent.

The need for better infrastructure puts India in a bind because it is frequently cited as a black mark on the economy, but with the country India is grappling to keep its fiscal deficit to 5.3 percent of GDP in a bid to keep its investment-grade rating, increased spending may not be forthcoming.

The bottom line is quite clear. With heavy allocations to the country's financial services and energy sectors, EPI and INDY can ill afford Indian debt to be rated as junk. Said differently, the more India can do to shore up its tenuous investment-grade rating, the better it is for India ETFs.

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