RPT-UPDATE 2-India likely to raise foreign investment limit in government debt-sources

Last Updated: Mon, Jun 09, 2014 11:52 hrs

(Technical repeat; text unchanged)

MUMBAI/NEW DELHI, June 9 (Reuters) - India will likely raisethe foreign investment limit in government debt soon, as almostall the allocation has already been taken up as overseas buyerspile into the country's financial markets, said four officialswith direct knowledge of the government's thinking.

The current cap is 995.46 billion rupees ($16.86 billion).

As of Friday, foreign investors owned 886 billion rupeesworth of government debt, or 89 percent of the full availableallocation, following a surge in inflows due to improvinggovernment finances and optimism about Narendra Modi's recentelection as prime minister.

Once the limit reaches 90 percent, foreign investors areonly allowed to buy debt under a more cumbersome auction biddingsystem.

"We will certainly look to raise the limit once it is closerto exhaustion," said one of the officials involved in theprocess, adding the government could allow foreign investors toinvest another $5 billion in the local debt.

The finance ministry will decide on the matter afterconsultations with the Reserve Bank of India and capital marketsregulator Securities And Exchange Board of India, the sourcessaid, without providing a specific timeline.

The sources declined to be identified as they were notauthorised to talk to the media about the plans.


Finance Secretary Arvind Mayaram told domestic news agencyCogencis that the government had no plan to raise investmentlimits for now.

"Why would we hike the limit just because they have reachedthe limit...The limits are set because of due considerations. Atthe moment there is no thought in changing the limits," Mayaramwas quoted as saying to Cogencis.

Mayaram did not reply to requests for comments from Reuters.

India's 10-year benchmark bond yield fell 3basis points to 8.49 percent after the Reuters news, but theyield then rose to 8.57 percent on the Mayaram comments toCogencis. It closed at 8.51 percent on Friday.

Foreign investors bought a net $425.43 million worth of debton Friday, their biggest daily purchase since May 23 andbringing their total this year to $8.6 billion.

Under current rules, India allows all types of foreigninvestors to buy up to $20 billion of government debt, althoughthe dollar amount depends on the exchange rate.

The total foreign investment limit is $30 billion, with theremaining $10 billion for investors such as foreign centralbanks, sovereign wealth funds, insurance funds and pensionfunds.

Investors have been expecting the government would raise theallocation for foreign investors once the 90 percent mark wasreached.

Last year, New Delhi had said it would increase the foreigninvestment cap in government bonds, depending on demand andeconomic requirements. However, it said the annual enhancementwould be within 5 percent of the gross annual borrowing of thefederal government, excluding buybacks.

But the government is still reluctant to fully free uplimits for its debt markets, an objection that has slowed downthe process of inclusion into global benchmark indices such asthose run by J.P. Morgan.

The current limit means foreign investors own only about 5percent of the total Indian government bond market.

The country last raised the amount of government debt thatforeign investors can buy by $5 billion in June last year.

The renewed interest comes on the back of hopes that Modiwill unveil big reforms, such as accelerating investments andclearing infrastructure projects, to boost an economy thatposted two consecutive years of below 5 percent growth - theworst slowdown in more than a quarter century. $1 = 59.0600 Indian rupees) (Reporting by Himank Sharma, Rajesh Kumar Singh and SuvashreeDey Choudhury; Editing by Rafael Nam & Kim Coghill and; RonPopeski)

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