India Boosts Foreign Debt Cap by $5 Billion to Defend Rupee

India has increased the amount of rupee-denominated debt overseas investors can own to arrest a slide in the currency, which sank to a record low on June 22.

The ownership ceiling on government bonds was raised by $5 billion to $20 billion, the central bank said in an e-mailed statement today. Long-term investors such as sovereign-wealth funds, multilateral agencies, endowment, insurance and pension funds as well as foreign central banks will be allowed to buy the securities, the Reserve Bank of India said in the statement. The combined limit on sovereign and corporate debt was last increased to $60 billion from $50 billion in November.

“Overall it’s positive as the higher limit means more demand for government bonds,” said Krishnamurthy Harihar, a Mumbai-based treasurer at FirstRand Ltd. “But there is some disappointment over how far the measures go.”

The move is intended to shore up Asia’s worst-performing major currency this year. Slowing economic growth, weak public finances, accelerating inflation and the risk of rating downgrades have contributed to a 21 percent decline in the rupee over the past year. Global funds raised their holdings of Indian notes by $4.2 billion this year to $30.3 billion, according to Securities & Exchange Board of India data.

The rupee pared gains to trade 0.4 percent stronger at 56.9075 per dollar as of 3:33 p.m. in Mumbai, according to data compiled by Bloomberg. It was up by as much as 1.3 percent earlier, rebounding from an all-time low of 57.3275. The currency has lost 6.6 percent in 2012.

Moody’s Maintains Outlook

Asia’s third-largest economy expanded 5.3 percent in the three months through March, the least in nine years, according to government data. Reserve Bank of India Governor Duvvuri Subbarao unexpectedly left interest rates unchanged last week and said inflation was still above “tolerance level”. Mukherjee wants to reduce the fiscal deficit to 5.1 percent of gross domestic product in the financial year that began April 1, from 5.76 percent last year.

Fitch Ratings last week joined Standard & Poor’s in signaling that the nation’s rating is at risk of demotion to junk status. Fitch lowered its outlook on India’s BBB- ranking, its lowest investment grade, to negative from stable, citing a deteriorating growth outlook and limited progress on paring the budget deficit. S&P and Moody’s Investors Service also assign India their lowest investment-grade levels.

Moody’s reaffirmed its stable outlook on India’s Baa3 rating today, saying the slowdown in growth and investment is likely to be temporary.

“Certain recent negative trends -- such as lower growth, slowing investment and poor business sentiment -- are unlikely to become permanent or even medium-term features of the Indian economy,” Moody’s said in a statement today.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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India Boosts Foreign Debt Ceiling by $5 Billion to Defend Rupee

Kuni Takahashi/Bloomberg

Slowing economic growth, weak public finances, accelerating inflation and the risk of rating downgrades have contributed to a 20 percent decline in the rupee over the past year.

Slowing economic growth, weak public finances, accelerating inflation and the risk of rating downgrades have contributed to a 20 percent decline in the rupee over the past year. Photographer: Kuni Takahashi/Bloomberg