Moody's which started rating Sri Lanka in 2010 lifted the outlook on its 'B1' rating to 'positive'.
Sri Lanka's central bank, which also manages the government's debt, said it welcomed the upgrade.
'…[T]he measures taken towards the macroeconomic stability and improvement of the economy over the past several years would yield further favourable results in coming years," the statement said.
The ratings come as Sri Lanka is looking to raise a billion dollars from international capital markets through a ten year bond.
In June, the central bank appointed Bank of America Merrill Lynch, Barclays Capital, Hongkong and Shanghai Banking Corp, and Royal Bank of Scotland as joint lead managers for the bond sale.
Sri Lanka has already started a series of meetings or 'investor updates' with bond buyers in Asia, Europe and the US, though it is strictly not a "deal road show", a source familiar with the sale said.
At the end of the shows, which are ending in the US the government has to option of launching a bond, if it judges the conditions in international markets are satisfactory, the source said.
"Sri Lanka is now familiar to bond buyers, some already have Sri Lankan bonds in their portfolios, they have been trading well," the source said.
"Some of the faces are also familiar. So they have comfort in knowing what has happened in the meantime."
Since 2007, Sri Lanka has sold one 500 million dollar bond and two billion dollar bonds.
However international bond markets are jittery, with several deficit spending European nations being hit with downgrades.
The US's AAA rating is also on watch as the country's lawmakers try to reign in Obama administration's spending.
Greece has already been downgraded to 'CCC' below Sri Lanka to speculative or junk status.
Sri Lanka's central bank and the finance ministry have been trying to push the country towards investment grade and have also appointed an advisory committee for the task.
Fitch's 'BB-' rating is still three levels below the lowest investment grade rating of 'BBB-'. Moody's rating is one level lower. Standard and Poor's also has a similar 'B+' rating for Sri Lanka.
If Sri Lanka goes to the markets in the next few days the country is likely to get most of the money from Asia and the US rather than Europe, an investment banker said.
Even in 2010 when a 10-year bond was sold for 6.25 percent, 52 percent of the money was raised from the US.