India Rupee, Bonds Gain as Foreigners’ Debt-Purchase Rules Eased

India’s rupee and sovereign bonds due 2022 rose the most in more than a week after the government said it will make it easier for foreign funds to buy local-currency debt.

All restrictions and sub-limits governing purchases of government and corporate notes will be removed from April 1, while keeping the overall cap at $25 billion for sovereign debt and $51 billion for securities issued by companies, Finance Minister Palaniappan Chidambaram said in New Delhi on March 23. A new “on tap” system will replace the existing auction procedure for foreign investment in corporate bonds, he said.

“The government’s step to simplify the investment framework for foreign institutional investors is positive,” said Nagaraj Kulkarni, a strategist at Standard Chartered Plc in Singapore. “Over the medium term, this should result in inflows into Indian local-currency bonds.”

The rupee advanced 0.3 percent to 54.1800 per dollar in Mumbai, the biggest gain since March 15, according to data compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose nine basis points, or 0.09 percentage point, to 8.63 percent.

The yield on the 8.15 percent bonds due June 2022 fell one basis point to 7.95 percent, the first decrease since March 15, according to the central bank’s trading system. Benchmark 10-year bonds yield a premium of 599 basis points over similar-maturity U.S. Treasuries.

‘Greater Worry’

The shortfall in India’s current account, the broadest measure of trade, is expected to be “significantly higher” in the year through March 2013 than the previous period’s record 4.2 percent of gross domestic product, Reserve Bank of India Governor Duvvuri Subbarao said Feb. 11. The debt-buying measures will help finance the nation’s current-account deficit, according to Moody’s Analytics.

This gap is a “greater worry” than the fiscal shortfall, Chidambaram said on Feb. 28. “This year, and perhaps next year too, we have to find over $75 billion to finance the current-account deficit.”

Three-month onshore rupee forwards traded at 55.26 per dollar, compared with 55.42 on March 22, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.17 versus 55.39. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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