India eases bond curbs for foreigners before Fed liftoff

[MUMBAI] India relaxed curbs on foreign ownership of its debt, giving global funds more access to Asia's best- performing bond market.

The limit on foreign institutional holdings of government notes will be denominated in rupees instead of dollars and the cap will be raised in phases to 5 per cent of outstanding debt by March 2018, the Reserve Bank of India said in a statement on Tuesday. The Finance Ministry estimates current overseas ownership is about 3.8 per cent, and the central bank said the increase will help attract 1.2 trillion rupees (US$18.2 billion) of additional investment.

Overseas funds have almost exhausted the previous limit of US$30 billion that was meant to shield local markets against capital outflows, and investors including Pacific Investment Management Co have been pressing for greater access to India's sovereign bonds. RBI Governor Raghuram Rajan had outlined the framework for easing limits in August and said the reforms will proceed even if the Federal Reserve delays increasing U.S. interest rates.

"The move reflects India's confidence to deal with any Fed- induced volatility," said Paresh Nayar, the Mumbai-based head of currency and money markets at the local unit of South African lender FirstRand Ltd. The decision to raise the investment limit is positive for bonds, he said.

Indian bonds rallied, pushing the 10-year sovereign yield to a two-year low, after the RBI relaxed foreign ownership curbs and cut its benchmark rate. The central bank also said it will increase the limit on overseas investment in loans of state governments to 2 per cent of the outstanding stock by 2018.

Foreigners hold less than 5 per cent of India's outstanding sovereign debt, one of the lowest proportions in Asia, according to DBS Bank Ltd. Such holdings stand at more than 35 per cent in Malaysia and Indonesia and are above 10 per cent in South Korea and Thailand, according to the lender.

Mr Rajan has built a war chest of near- record foreign-exchange reserves as the nation seeks to avoid a repeat of 2013, when the Fed's signal that it would end its bond purchases saw investors pull about US$9 billion from Indian notes in the June to August period, causing the rupee to plunge to a historic low.

The rupee has rebounded about 4.3 percent from an unprecedented 68.845 a dollar on Aug. 28, 2013, outperforming South Africa's rand, Indonesia's rupiah, Turkey's lira and Brazil's real. Morgan Stanley dubbed the currencies the "Fragile Five" that year for being the most at risk of capital flight.

Narrower current-account deficits in Indonesia and India put them in a stronger position to endure outflows than two years ago, Jens Nystedt, managing director at New York-based money manager Morgan Stanley Investment Management, said in an interview earlier this month.

BLOOMBERG