Mumbai/New Delhi: In a bid to prop up the battered rupee, the Reserve Bank of India (RBI) on Monday hiked the limit of overseas investments in government bonds and announced a few other measures to improve market sentiments.
The limit of overseas investment in government bonds has been raised by $5 billion to $20 billion and that of external commercial borrowings to $10 billion.
Certain manufacturing and infrastructure companies that earn foreign exchange can now borrow from overseas markets to repay rupee loans for capital expenditure.
"The overall ceiling for such ECBs would be $10 billion," the central bank said.
The measures are aimed at attracting more foreign investments that would help revive the battered currency, which hit a record low of 57.33 to the dollar last week.
The RBI announced the new measures after discussions with Finance Minister Pranab Mukherjee and Economic Affairs Secretary R Gopalan.
The Reserve Bank of India said in a statement that it has taken measures "in consultation with the government of India". The new measures are introduced with immediate effect.
However, the move failed to cheer the markets as investors were expecting bolder steps.
The rupee pared the gains and ended the day 0.2 percent higher at 57.01 after rallying 1.3 percent before the announcement was made. Benchmark indices of the Indian equities markets also ended in the red.
Chairman of the the Prime Minister's economic advisory council C. Rangarajan said the RBI measures will have some impact on the currency in the short run.
"This will have some impact on capital flow of the country. A inflow of funds should help the currency," Rangarajan, a former RBI governor, said.
Planning Commission Deputy Chairman Montek Singh Ahluwalia said the regulators would announce more such measures to revive growth and boost foreign funds inflow.
Reacting to the tepid response from the currency and equities markets, Ahluwalia said: "Markets move up, markets move down. I would not judge the measures by what market does on any one day."
The RBI said the existing limit for investment by Securities and Exchange Board of India (SEBI) registered foreign institutional investors (FIIs) in government securities (G-Secs) has been enhanced by a further amount of $5 billion.
This would take the overall limit for FII investment in government securities from $15 billion to $20 billion.
"In order to broad-base the non-resident investor base for G-Secs, it has also been decided to allow long-term investors like Sovereign Wealth Funds (SWFs), multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks to be registered with SEBI, to also invest in G-Secs for the entire limit of $20 billion," the RBI said.
The sub-limit of $10 billion (existing $5 billion with residual maturity of 5 years and additional limit of $5 billion) would have the residual maturity of three years.
The RBI said Qualified Foreign Investors (QFIs) can now invest in those mutual fund schemes that hold at least 25 percent of their assets, either in debt or in equity or both, in infrastructure sector under the current $3 billion sub-limit for investment in mutual funds related to infrastructure.
"The steps announced so far are probably minimal at this time but could lead to some inward capital flows if this is supported by stronger fundamentals," said R. V. Kanoria, president, Federation of Indian Chambers of Commerce and Industry (FICCI).
Kanoria said the industry was hoping for a "broadbased set of strong actions as well as policy reforms that could have a positive bearing on the overall environment."
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