India hikes foreign investment cap on bonds

By Sarah Turner, MarketWatch

SYDNEY (MarketWatch) -- India’s decision to raise the limits for foreign investment in government and corporate bonds Thursday was likely to attract more funds to develop the country’s infrastructure and bond markets and could lead to the rupee’s appreciation, analysts said.

The government on Thursday doubled foreign investment limits in government securities to $10 billion from $5 billion and increased the limit for corporate bonds to $20 billion from $15 billion.

It said that it believes the move will help to raise investment in bonds, infrastructure and develop bond markets in India at the same time as balancing its monetary policy.

Strategists at Barclays Capital noted that investors will only be able to invest in securities with a residual maturity of at least five years and corporate bond investments will have to be made in securities issued by infrastructure firms.

“We view this development as a positive for both the bond and currency markets,” they said. The five-year maturity condition will help attract non-leveraged real-money investors, they believe.

The Indian rupee weakened against the U.S. dollar after strong recent gains, with the greenback changing hands for 45.58 rupees from 45.49 rupees the previous day. The dollar is down about 3% so far this month against the Indian currency.

Economists at Bank of America’s Merrill Lynch unit expressed relief at the Indian government’s move to lift the investment limits, saying that they believe that the Reserve Bank of india needs to provide liquidity to fund growth.

“The RBI will need to inject liquidity to meet 20% loan demand and a high fiscal deficit as inflation comes off,” they said.

“With the Fed appearing to move closer to a second round of quantitative easing and with U.S. yields likely to remain lower for longer, we expect real money investors to buy into these increased limits,” they said.

Also on Thursday, India said it will borrow 1.63 trillion rupees ($36 billion) in the second half of the fiscal year to March 2011, according to a report from Reuters. That’s marginally less than the 1.7 trillion rupees it originally planned to borrow, according to the report.

Sarah Turner is MarketWatch's Sydney Bureau Chief.