India Seeks to Boost Inflows by Raising Debt Cap to $75 Billion

India took a step to spur capital inflows and avert a debt-rating downgrade by raising a limit on foreign investment in rupee bonds by $10 billion to $75 billion.

The nation boosted the cap on holdings of government debt yesterday to $25 billion from $20 billion while an ownership ceiling for corporate notes was increased to $50 billion from $45 billion, according to a statement on the Reserve Bank of India’s website. The rupee erased a 0.4 percent 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 percent last quarter as the current-account deficit widened to $22.4 billion.

“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.”

Rupee, Bonds

The rupee ended little changed yesterday in Mumbai at 53.685 a dollar, after having traded 0.1 percent stronger on the day earlier, according to data compiled by Bloomberg. The yield on the 8.15 percent government bonds maturing in June 2022 rose 1 basis point, or 0.01 percentage point, to 7.88 percent, according to the central bank’s trading system. Local bond and currency markets are shut today for a holiday.

Rupee-denominated debt returned 11 percent 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 U.S. Treasuries.

Global funds bolstered holdings of rupee-denominated government and corporate bonds by 26 percent in 2012 to $32.9 billion. The amount reached a record $33.3 billion on Jan. 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.

Interest Rates

The Reserve Bank of India will cut its repurchase rate by 25 basis points to 7.75 percent at its next review on Jan. 29, according to 22 of 26 analysts in a Bloomberg survey. Three predict a cut to 7.50 percent 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 Jan. 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 percent 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 percent of gross domestic product for the 12 months through March 2014. He vowed the gap won’t breach his target of 5.3 percent of GDP in the current fiscal year “under any circumstance.”

‘Path of Consolidation’

“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 Jan. 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.”

The government allowed state refiners last week to fix diesel prices on their own for the first time in more than a decade, a move aimed at reducing the government’s subsidy payments and improving public finances.

Bond risk in India fell this year. The cost to insure State Bank of India’s debt, considered a proxy for the sovereign by some investors, for five years against non-payment using credit-default swaps fell 20 basis points to 206, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

‘Ensuring Growth’

Option traders are the most bullish on India’s currency in four years. One-year contracts, conferring the right to sell the rupee against the dollar, cost 140 basis points more than those to buy yesterday, near the least since November 2008. The so-called risk reversal rate has slid 270 basis points in the past year.

“Where we can aid growth is through reforms,” Rajan said. “We play an enabling role. Ultimately, the economy itself, the private sector and the public sector, will play the dominant role in ensuring growth. But we can create the framework. We have done a fair amount and we will do more.”

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