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Govt Takes Steps To Boost Inflows; Market Unmoved

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Prepped up by hopes of big measures to kickstart the economy as India had been led to believe by the outgoing finance minister Pranab Mukherjee, India took a handful of measures to prop up the embattled rupee on Monday, including hike in FII limit into sovereign debt and liberalising overseas borrowing norms for exporters, but failed to arrest slide in rupee and stock markets. The much-hyped measures, aimed at increasing overseas capital inflows, fell short of market expectations. The rupee touched a record low of 57.92 against a dollar, immediately after simultaneous announcements by RBI and the government. The stock market too gave away the early gains and the Sensex closed 90 points lower. The measures will have limited impact on the currency in the short run, the prime minister's top economic adviser C. Rangarajan told television channels. The foreign institutional investors (FIIs) can now invest $20 billion into government securities (G-Sec), against the present limit of $15 billion. Within this limit, sovereign wealth fund, insurance funds, pension funds, foreign central banks and multilateral agencies can participate. The lock-in period for FII investment up to $10 billion into G-Secs has been reduced to three years from five years, according to Finance Ministry. Companies in the manufacturing and infrastructure sectors with three-year track record of forex earnings, can now raise external commercial borrowings (ECBs) up to $10 billion a year. "We are looking at companies which have a large export potential to access money from abroad and have a large investor base," Joint Secretary in the Finance Ministry Thomas Mathew told reporters. As a further liberalisation measure, individual overseas investors can now bring in up to $3 billion into mutual fund debt schemes which invest up to 25 per cent of their assets in infrastructure. Earlier, the limit was 100 per cent. Planning Commission Deputy Chairman Montek Singh Ahluwalia said, "We will soon see (more) measures ... on implementation of large projects on which the Prime Minister has set up new mechanism to move things faster. . The decisions have been taken "in consultation with the government," the RBI said, adding that they will widen foreign investor base for government securities (G-Secs). With Monday's measures, the indicative annual ECB ceiling for Indian companies now stands at $40 billion, up from $30 billion. India Inc has raised $34.40 billion by way of ECBs in 2011-12 fiscal. In the April-May period of the current fiscal, the companies have already mopped up $5.97 billion. Besides, the government today also rationalised norms for FII investment in long term infrastructure bonds. At present FIIs can invest $25 billion in such bonds. Of the $25 billion, they can invest USD 10 billion in Infrastructure Debt Fund (IDF), with a reduced lock-in period of one year, from three years, the finance ministry said. Besides, FIIs can now invest up to $12 billion in long term infra bonds having a lock-in period of one year and a residual maturity of 15 months. "The measures are aimed at greater flow of funds into the infrastructure sector. We expect enormous flows through qualified foreign investors (QFIs) in the next 18-24 months," Mathew said. He further said that the government is working on the proposal to bring down withholding tax on interest payment on ECBs to 5 per cent, from the present 20 per cent, for three years as announced in the Budget. "The increase in the ECB and G-Sec limits will be positive for the INR in the near term but are unlikely to have any immediate impact on the equity markets," Religare Capital Markets MD & Head of Equities Gautam Trivedi said. Falling Market Earlier, the rupee rallied on Monday on hopes for government measures to halt a slump in the currency, which hit a record low on Friday, with traders saying action to boost long-term foreign investment would be the most effective step. However, the rupee and BSE Sensex trimmed gains after the Reserve Bank of India announced it would raise investment limits in government bonds, disappointing investors who had expected bolder measures. Abheek Barua, chief economist, HDFC Bank said these measures, if they are the complete set of measures, are tame, and disappointing compared to the market expectations. The market was expecting hefty inflows through some millennium deposit scheme, or so, but these measures alone won't do much. "Global factors are likely to take over, and negative momentum may return and the rupee may breach 57 to a dollar and beyond. Will wait for the rest of the day, to see if more measures are coming." As Jonathan Cavenagh, snior forex strategist, Westpac, Singapore said  it was not quite the 'shock and awe' the market was looking for but "we shall see what else gets announced. Not surprised to see USD/INR higher". "Until they address longer term structural issues around capital flows and competition in the domestic retail sector which can help bring down inflation pressures, I think market will be left disappointed," said Caavanagh. M. Natarajan, head of treasury, Bank of Nova Scotoa, Mumbai said "the market was expecting a slew of measures. The measures announced now won't have any direct material bearing on the rupee. Unless the RBI comes in with more measures, the rupee will fall back to the 57-58 to a dollar levels." The rupee posted its worst weekly fall in nine months last week, having slumped to a record low of 57.32 against the US dollar on Friday, hurt by dollar demand from oil firms and gold importers as well the broad risk-off sentiment. The Reserve Bank of India left interest rates unchanged last week, defying widespread expectations for a rate cut as it warned that doing so could worsen inflation, disappointing markets. To add to the pessimisic views, the economy has been slowing sharply due to a combination of factors such as high borrowing costs, government inaction on key policies and sluggish global environment. Standard & Poor's has said that India could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country. Industrial output rose just 0.1 per cent in April, lower than expectations in a Reuters poll for a 1.7 per cent increase. Output fell in March from a year earlier by 3.5 per cent. Economic growth slowed to 5.3 per cent in the March quarter, its weakest pace in nine years and sharply off 9.2 per cent rise in the year-earlier period. Price pressures remain high with the wholesale price inflation accelerating to 7.55 percent in May from a year earlier, driven by double-digit rises in food and fuel prices. The government was expected to introsuce bonds for non-resident Indians with an interest rate of 7-9 per cent, a source with knowledge of the matter said, as speculation over imminent measures was rife in India's markets. Traders and analysts said measures could include changes to foreign bond investment limits to attract more inflows into government and corporate securities. Another possibility would allow oil importers to buy their dollars directly from the Reserve Bank of India (RBI) rather than via the foreign exchange market. "The impact will be temporary unless long-term steps like boosting FDI and curtailing current account deficits are taken," said Kumar Rachapudi, fixed income strategist in Singapore at Barclays, which expects the rupee to strengthen to 52 to the dollar by the end of 2012. However, analysts said these sorts of measures would provide only stop-gap relief and that India needed to improve its economic fundamentals, including addressing its current account deficit, to bolster the rupee. "A sustainable solution would need a reduction of the current account deficit to around 2-2.25 percent of GDP with tighter fiscal policy, acceptance of slower consumption growth, and implementation of reforms that improve the business climate to encourage FDI inflows," the bank said in a client note. Range Of Possibilities RBI has discussed with state-run oil firms steering 50 per cent of their dollar purchases via a single state-owned bank to smooth volatility in the rupee, though no decision has been made, two oil executives said on Friday. Dollar purchases from oil companies account for around $10-$12 billion of dollar demand in domestic currency markets each month, according to HSBC. Another measure might be to provide a special central bank window to sell dollars directly to oil companies, traders said. India needs to shore up its credibility among investors, both in sticking to its projected fiscal deficit of 5.1 percent for the fiscal year ending March 2013 and to narrow its current account deficit, analysts said. "In the short term, apart from augmenting capital inflows via a special dollar deposit scheme, we believe policy makers have few options to manage exchange rate volatility if risk aversion in global financial markets continues," Morgan Stanley wrote. Another option would enable the RBI to provide dollars to oil companies against oil bonds, which would help in removing dollar demand from the market and containing rupee volatility. Standard & Poor's and Fitch Ratings have cut their outlook on India's sovereign ratings to negative, threatening its investment-grade status, citing slowing policy reforms. Moody's Investors Service on Monday though said it was maintaining a stable outlook for India's Baa3 rating. It said slowing growth and higher levels of inflation were already factored into the outlook. In a shot in the arm for the economy, Sweden's IKEA, the world's largest furniture retailer, said on Friday it would invest 1.5 billion euros to open 25 stores in India.