The change suggests that the rating's company is considering raising India's BB+ rating, one level below investment grade, a move which would make India more attractive to foreign investors.
Ping Chew, Standard & Poor's rating analyst, said that if India continued on its current course, achievement of investment grade would be likely.
"Further liberalization of the economy and infrastructure improvements will help India's trend growth," said Mr Ping.
"Such reforms coupled with continued fiscal consolidation will help India achieve investment grade over time."
Typically, an outlook upgrade is followed by a ratings upgrade, although Mr Ping warned that all depended on the performance of the Indian economy.
"If the fiscal consolidation stalls or the reform agenda derails, the outlook could be revised to stable," he said.
Despite this warning, many observers see the move as a vote of confidence in the Indian economy, in particular as a location for overseas investment.