India took a step to lift capital inflows and avert a debt-rating downgrade by raising a limit on foreign investment in rupee bonds by $10bn to $75bn.
Bloomberg reported that the nation boosted the cap on holdings of government debt on Thursday to $25bn from $20bn while an ownership ceiling for corporate notes was increased to $50bn from $45bn, according to a statement on the Reserve Bank of India’s website. The rupee erased a 0.4 per cent loss after the announcement. Bonds were little-changed.
Prime Minister Manmohan Singh has boosted efforts to revive Asia’s third-largest economy since mid-September, cutting fuel subsidies and opening up more industries to overseas investment, after Standard & Poor’s and Fitch Ratings warned the nation’s investment-grade rating is at risk. The move to spur debt inflows comes after the rupee slid 3.9 per cent last quarter as the current-account deficit widened to $22.4bn.
“This will help increase inflows to India in the short-and medium-term, especially as sentiment towards the economy has been improving,” said Siddharth Mathur, strategist at UBS AG in Singapore. “But this is just a single measure that may help at the margin. It isn’t a silver bullet. I wouldn’t overplay its significance as India’s structural current-account deficit needs structural solutions.”
The rupee ended little-changed yesterday in Mumbai at 53.685 a dollar, after having traded 0.1 per cent stronger on the day earlier, according to data compiled by Bloomberg. The yield on the 8.15 per cent government bonds maturing in June 2022 rose 1 basis point, or 0.01 percentage point, to 7.88 per cent, according to the central bank’s trading system. Local bond and currency markets are shut today for a holiday.
Rupee-denominated debt returned 11 per cent in the past year, the best performance among Asia’s biggest local-currency fixed-income markets, HSBC Holdings Plc data show. The yield on India’s 10-year sovereign notes dropped 69 basis points since the end of 2011, according to data compiled by Bloomberg. The securities still offer an extra 608 basis points over similar- maturity US Treasuries.
Global funds bolstered holdings of rupee-denominated government and corporate bonds by 26 percent in 2012 to $32.9bn. The amount reached a record $33.3bn on January 3 after central bank Governor Duvvuri Subbarao said last month policy makers need to focus on supporting the economy, fueling speculation the monetary authority will cut interest rates.
The Reserve Bank of India will cut its repurchase rate by 25 basis points to 7.75 per cent at its next review on January 29, according to 22 of 26 analysts in a Bloomberg survey. Three predict a cut to 7.50 per cent and one sees no change. The measure was last lowered by 50 basis points in April.
The RBI has some room to ease policy to spur growth, Raghuram Rajan, the top adviser in the nation’s finance ministry, said in an interview on January 23. He spoke in Singapore, during an international tour by Finance Minister Palaniappan Chidambaram to woo investors as the government strives to revive growth. India’s economy will expand as little as 5.7 per cent in the 12 months through March, the slowest pace in a decade, according to official estimates.
Chidambaram said this week fiscal prudence will be a key budget theme next month, pledging to reduce the government’s deficit to 4.8 per cent of gross domestic product for the 12 months through March 2014. He vowed the gap won’t breach his target of 5.3 per cent of GDP in the current fiscal year “under any circumstance.”
“It’s absolutely important to signal to the world that we are on the path of fiscal consolidation,” Chidambaram told investors in Hong Kong on January 22. “In the last five and half months, we have addressed the problem in small but significant steps. Add all these together, and we will see we have traveled quite a distance. There’s no case at all to downgrade India.”