India widened efforts to lure $75 billion to its capital markets to include investors in at least 10 countries from the U.S. to Russia, signaling increased urgency among policy makers to bolster growth and stem the rupee’s drop.
Government and central bank officials will embark next month on an overseas trip to woo foreign asset managers and high-net worth investors, Thomas Mathew, joint-secretary for capital markets in the finance ministry, said in an interview in New Delhi. The tour, aimed at stoking demand for equities and bonds, had initially been limited to the Middle East.
India is grappling with the slowest economic expansion since 2009 and a record current-account shortfall that has made the rupee the worst performing Asian currency in the past three months. Prime Minister Manmohan Singh, already beset by corruption scandals, this month was forced to retreat from a proposed tax amendment in a bid to salvage investor confidence.
“India has a lot of house-made problems, especially on the political side,” Juergen Maier, a fund manager at Raiffeisen Capital Management who has about $1.1 billion in emerging-market assets, said in a telephone interview from Vienna. “My outlook on India has grown increasingly negative over the last two years because of its political problems.”
The proposed investment target, which is for a two-year timeframe, appears “ambitious,” said Neelakantan Sethuram Iyer, chief investment officer of Daiwa Asset Management (India) Pvt. in Mumbai.
Foreigners have only invested about 6.26 trillion rupees ($117 billion) in stocks and bonds since they were allowed into the country in 1993, according to data from the Securities & Exchange Board of India. This year, the total has been about $11.2 billion, the data show.
Economic Affairs Secretary R. Gopalan will lead a group of officials from the finance ministry, central bank and capital markets regulator on the trip, according to Mathew, to tout reforms such as eased limits on foreign investment in bonds, and rules that let qualified foreign investors buy shares directly. Company executives won’t be present at the proposed meetings, which will be held in the U.K., Hong Kong, Japan, Saudi Arabia, Kuwait and the United Arab Emirates.
“It’s high time we did this,” Mathew said on May 8. “We believe that India’s strong fundamentals and opening up of capital markets in the last 18 months should be brought to the notice of investors all over the world.”
Fund managers thus far don’t appear to be convinced. The nation’s equity benchmark BSE India Sensitive Index (SENSEX), which had climbed as much as 19 percent by Feb. 21, has now pared back gains to 6.6 percent, while the rupee is approaching a record low touched in December.
International investors have also pulled about $2 billion from India’s rupee-denominated government and corporate bonds since the start of February after the projected budget deficit widened. Confidence waned further after Standard & Poor’s said in April that it may cut the sovereign credit rating to junk, and economic growth slowed to an estimated 6.9 percent for the year ended March 31.
“India has seen continuous negatives on the macro-economic front and virtually no reforms,” Daiwa’s Iyer said in an interview from Mumbai. “Investments are needed in capital formation to renew growth, and that’s not happening.”
Offshore funds turned into net sellers of Indian stocks in April, the first month of withdrawals in 2012, after having pulled out $512 million in 2011. The withdrawals compared with a record $24 billion in inflows in 2010, and led to a 25 percent decline in the Sensex last year and a 16 percent drop in the rupee to a record low.
Policy makers’ woes have escalated as persistent inflation curtails the central bank’s ability to lower borrowing costs and bolster growth, while UBS AG estimates the rupee may drop to a record 56 per dollar by March 2013.
Investors have also been battered by bad news on the corporate front. Singh’s administration in December reversed a decision to let multi-brand companies such as Wal-Mart Stores Inc. (WMT) and Carrefour SA (CA) open supermarkets in India’s $400 billion retail market, while India’s top court scrapped 122 telecom licenses tainted by graft allegations in February.
Such policy setbacks are continuing to mount: Finance Minister Pranab Mukherjee this month announced that a rule to curtail tax avoidance will be delayed to April 2013 after it fueled concern that foreign investments would fall.
The pullback on the planned General Anti-Avoidance Rule, or GAAR, is “just a small step in the right direction,” Raiffeisen Capital’s Maier said.
Part of the problem is that reforms undertaken by the government to open up capital markets in the last 18 months “have not reached the right places with the right perspective,” said Mathew, the finance ministry official.
The steps taken include an increase in foreign investment limits for long-term infrastructure bonds, corporate bonds and government securities. The limit on external commercial borrowings was also raised and qualified foreign investors were allowed to invest in specified India mutual funds and directly in equities, Mukherjee said in parliament on March 16.
Now the government will partner with investment banks that are dominant in those markets -- including Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) -- to help organize meetings and get that message across to investors, Mathew said.
As officials take their pitch overseas, investors will be looking for some assurances that policy-makers will follow through on pledges to spur the economy.
“India needs to show it can deliver on the macro-economic front and not promise something and roll back in a few weeks’ time,” Raiffeisen’s Maier said. Until the political issues are resolved, “investor interest will be very low.”