India is considering raising bond-holding limits for foreign buyers in categories about to exhaust quotas to boost capital inflows, two finance ministry officials with direct knowledge of the matter said.
The Reserve Bank of India is studying a proposal from the ministry to increase the cap on so-called old category government securities to $15 billion from $10 billion, the people said, asking not to be identified citing rules. Overseas investors may be able to buy as much as $25 billion of similar corporate debt, versus a previous limit of $20 billion, the officials said.
The government is seeking to enhance the supply of debt securities that are in demand, while reducing the limit on those including long-term notes issued by infrastructure companies. Policy makers plan to retain the ceiling for total debt ownership by foreigners at $66.5 billion, of which $20 billion is for rupee-denominated sovereign notes, the people said.
Boosting inflows may help bridge a shortfall in India’s current account, which widened to a record $21.8 billion in the first quarter of 2012 before narrowing to $16.6 billion in the three months through June. The gap drove the rupee to a record low in June. Prime Minister Manmohan Singh’s chief economic adviser Chakravarthy Rangarajan said yesterday that a high deficit fuels currency volatility.
“Given the kind of current-account deficit concerns, capital flows need to get encouraged,” said Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd. “Although the fiscal deficit is mostly domestically financed, the increase in foreign investment limit will be incrementally positive for the government as the borrowing program is huge.”
Overseas funds holdings of rupee debt was $32.5 billion as of Nov. 16, which is 49 percent of the total ceiling, according to data compiled by Bloomberg.
Foreigners have used 94 percent of the old government debt category and 84 percent of old corporate debt category limits as of Oct. 31, according to data on the Securities & Exchange Board of India’s website. Overseas investments in long-term debt sold by infrastructure companies was just 31 percent of the $12 billion limit.
The government has a record borrowing program of 5.69 trillion rupees for the fiscal year ending March as it seeks to reduce the fiscal deficit to 5.3 percent of gross domestic product from 5.8 percent last year.