India Prepares to Counter Rupee’s Slide

India boosted the amount of government bonds foreign investors can purchase by $5 billion, seeking to bolster demand for the rupee after it tumbled to a record low against the dollar.

Foreign institutional investors can now purchase $20 billion worth of government securities, up from $15 billion, the Reserve Bank of India said in a statement today. Long-term overseas buyers such as sovereign wealth funds, central banks and pension funds will be allowed to invest in the debt directly to broaden the base of investors, the Reserve Bank also said.

The rupee pared gains after the statement as expectations of wider steps, spurred by Finance Minister Pranab Mukherjee’s comments two days ago that officials will announce measures to stabilize the currency, were disappointed. The rupee is Asia’s worst performer of the past year, having tumbled 21 percent versus the dollar, and its decline has contributed to an inflation rate that the central bank deemed last week too high to allow an interest-rate cut.

“These are just stop-gap arrangements and disappointing after they built up high expectations,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc. “The underlying issues of more economic reforms and cutting subsidies are still not being addressed. What has the government done to reduce the fiscal deficit and curb the current-account deficit?”

The rupee pared gains after the announcement, climbing 0.2 percent to 57.06 per dollar as of 4:38 p.m. in Mumbai after earlier surging as much as 1.3 percent. The currency reached an all-time low on June 22 of 57.3275 per dollar. The BSE India Sensitive Index slipped 0.5 percent. The yield on the 8.15 percent bond due June 2022 was little changed at 8.08 percent.

Overseas Borrowing

The Reserve Bank also said today that certain manufacturing and infrastructure companies that earn foreign exchange can borrow from overseas to repay rupee loans for capital expenditure, or to fund such spending. The ceiling for the facility is $10 billion, the central bank said.

Qualified foreign investors can now put money into mutual funds with at least 25 percent of their assets in the infrastructure sector, the Reserve Bank also said.

The monetary authority on Nov. 17 increased the caps on overseas investors’ holdings of India’s local-currency government debt and corporate bonds by $5 billion each.

Policy makers are considering as many as 12 measures to halt the rupee’s slide, a government official familiar with the plan said before today’s announcement. The official asked not to be identified because the details weren’t public.

Foreign Debt

Indian companies face a record $5.3 billion of maturing foreign-currency debt this year, data compiled by Bloomberg show. At the sovereign level, Fitch Ratings cut its outlook for India to negative on June 18, joining S&P in signaling the country is at risk of losing its investment-grade status. Moody’s Investors Service said today it is maintaining its stable outlook.

While most emerging-market currencies have retreated in recent months as Europe’s crisis prompted investors to flee riskier assets, the rupee has underperformed as India failed to rein in its budget deficit and economic reforms stalled.

Officials stepped up the fight to steady the rupee earlier this year. The efforts included curbs on trading in currency derivatives to rein in volatility and a move to boost the supply of dollars by cutting the amount of overseas income companies can hold in foreign currency to 50 percent from 100 percent. India has also raised interest rates on non-rupee deposits.

Oil Secretary G.C. Chaturvedi said June 22 that the central bank has asked oil refiners to obtain 50 percent of their dollar requirements from a single state-owned bank.

Price Pressures

India’s benchmark inflation rate has remained elevated even as that of other Asian nations retreats. Wholesale prices rose 7.55 percent in May from a year before, compared with 7.23 percent in April, stoked in part by food costs.

Prime Minister Manmohan Singh’s administration has seen its agenda stymied by opposition from its own coalition allies, and last year suspended a plan to allow overseas retailers such as Wal-Mart Stores Inc. to open supermarkets selling multiple brands in the country. An anti-corruption bill and proposals to allow foreign direct investment in pensions have also stalled.

The government allows companies that sell products under a single brand to own operations in India. Swedish furniture retailer IKEA will boost the amount of products sourced from the nation significantly and may invest 600 million euros ($749 million) to open stores, the government said last week.

India’s gross domestic product rose 5.3 percent last quarter from a year earlier, the slowest pace since 2003. The trade deficit widened to a record $184.9 billion in the fiscal year ended March. The government projects unprecedented borrowing of 5.69 trillion rupees ($100 billion) in 2012-2013 to fund its budget shortfall.

Mukherjee, the ruling Congress party’s nominee for the largely ceremonial role of president, said on Bloomberg UTV today he will resign from his current post tomorrow. A group of federal and state legislators elects the next president July 19.

While Mukherjee’s successor has yet to be named, the approaching personnel shift in India’s leadership may offer Singh an opportunity to reinvigorate the government’s agenda.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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