India to Ease Investment Rules for Foreign Funds in Rupee Bonds

India will ease investment rules for foreign funds purchasing government and corporate bonds, a move that may help boost inflows from abroad to finance a record current-account deficit.

The government will remove all restrictions and sub-limits within the two broad categories starting April 1, keeping the cap for sovereign debt at $25 billion and $51 billion for securities issued by companies, Finance Minister Palaniappan Chidambaram told reporters in New Delhi last week. A new “on tap” system will replace the existing auction procedure for foreign investment in corporate debt, he said.

“There were a number of sub divisions,” Chidambaram said. “To rationalize, it is proposed to merge the sub limits.”

The measure is the latest in a series of policy changes Chidambaram has spearheaded since September to revive a faltering economy, including opening up aviation and retail industries to foreigners. The government estimates India needs more than $75 billion of foreign capital this year and next to fund the current-account deficit, which widened to $22.3 billion in the three months to Sept. 30, or 5.4 percent of the nation’s gross domestic product.

“It’s important in the context of the whole range of reforms that they’ve done,” said Glenn Levine, a Sydney-based senior economist with Moody’s Analytics. India’s bond market “is not particularly well-developed and it’s not particularly open to foreigners,” he said, adding that the move will make it easier for portfolio investors and reduce volatility on the external account and the rupee.

The rupee has appreciated 2 percent versus the dollar since the policy revamp began on Sept. 13, and traded at 54.34 on March 22, according to data compiled by Bloomberg. Still, the currency remains down 5.8 percent in the past 12 months, a period when the S&P BSE Sensex climbed 8 percent.

Investor Feedback

Chidambaram is relaxing the restrictions in response to feedback from investors when he met them on a tour of Asia and Europe almost two months ago.

The investment limit on corporate bonds will be reviewed when 80 percent of the cap is exhausted, Chidambaram said. The cap on government bonds will be enhanced based on “utilization levels, demand from foreign investors, macroeconomic requirements and on prudent offshore and onshore balance.”

“It makes it easier for foreign institutional investors,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “It will increase the ticket size of investments since the sub-limits have been removed. It will widen the pool of foreign investors.”

The $1.8 trillion economy will probably expand 5 percent in the financial year ending March 31, according to government estimates, the slowest pace in a decade.

Chidambaram vowed to cut the budget deficit to 4.8 percent of GDP next year, from an estimated 5.2 percent this year, seeking to avert a downgrade in credit ratings after Standard & Poor’s and Fitch Ratings lowered the sovereign outlook to negative, a step closer to junk status.

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