UPDATE 1-Indian rupee, markets draw cold comfort from relaxed FDI rules

Last Updated: Wed, Jul 17, 2013 11:11 hrs

By Rafael Nam and Archana Narayanan

MUMBAI, July 17 (Reuters) - India's relaxation of foreign investment rules, aimed at drawing funds needed to turn around slowing economic growth and support a crumbling rupee, barely lifted markets on Wednesday due to doubts whether long-term inflows would materialise anytime soon.

Prime Minister Manmohan Singh eased FDI rules late on Tuesday for several industries, including insurance and telecoms, although some of the liberalisation measures fell short of expectations or came with caveats. (For Factbox double click on )

The long-pending move to increase the foreign direct investment (FDI) cap in insurance from 26 to 49 percent, for example, still needs approval from parliament, where a bill has been stuck for months.

The measures came a day after the central bank mounted a defence of the rupee by tightening liquidity and lifting short-term interest rates, in order to make speculation against the currency more difficult.

Those moves helped to slightly steady a currency that has lost 9 percent against the dollar since the start of May, making it the worst performer among emerging Asian currencies tracked by Reuters, but have not allayed investor worries about the country's record-high current account deficit.

"Foreign investment rules easing and the recent RBI measures will not be enough to entice overseas investors. The government should declare a war on the current account deficit," said Hitendra Dave, head of global markets at HSBC India in Mumbai.

"All measures in that light will work. Otherwise, collateral damage will be too high."

The RBI's measures sent bond yields soaring and raised worries that the increased costs to borrowers will crimp growth already at a decade low of 5 percent.

The RBI's measures have had unintended consequences.

The central bank rejected all bids in a $2 billion sale of Treasury bills on Wednesday as investors and the RBI were locked in a stand-off over the appropriate price for debt after Tuesday's bond rout. That could also make it tougher for the central bank's $2 billion debt sale planned for Thursday.

The RBI's tightening measures also led to a surge in redemption requests for mutual funds, forcing the central bank to provide a special funding facility for them in a move last taken during the financial crisis in 2008.


"FDI easing only makes it easier for foreign investors to put their money in India, but it doesn't change the fundamentals that determines whether it is a good idea to put money in India in the first place," said Nizam Idris, head of fixed income and currency strategy at Macquarie in Singapore.

Worryingly for investors, Singh's weak coalition government has struggled to push through reforms and has limited firepower for further measures as it faces elections by May.

Among the steps announced on Tuesday, the foreign investment cap in telecoms, which stood at 74 percent, was removed. But the measure was not expected to draw fresh entrants as the cut-throat industry is already crowded, and plagued by regulatory uncertainty.

Instead, existing foreign operators such as Vodafone Group Plc, Telenor ASA and Sistema may opt eventually to buy out their local partners.

"I'm not aware that there are any foreign companies who have said that they are hindered because the country doesn't allow 100 percent FDI," said Mahesh Uppal, director at telecoms consulting firm Com First (India).

"I think resolution of regulatory issues would be far more important for any investor, foreign and Indian," he said.

India's broader NSE index rose 0.3 percent on Wednesday, but Bharti Airtel and Idea Cellular gave up initial gains to fall.

Having opened steadier than Tuesday's close of 59.31/32 per dollar, the rupee went on to ease slightly to 59.53/54, not far from levels at which the currency was trading before the RBI's measures.

It hit a record low of 61.21 to the dollar on July 8, as a sea-change in global investment trends over the past few months has seen funds flow out of emerging markets, rendering those with high current account deficits, like India, particularly vulnerable.

Meanwhile the 10-year bond yield fell 3 basis points to 8.04 percent, having surged 52 bps on Tuesday.


Although the government hopes its latest reforms attract long term capital flows, previous measures have had mixed results, and FDI fell to $36.9 billion in the fiscal year ending in March from $46.6 billion the previous year.

A move last September to allow foreign direct investment in supermarkets has not attracted a single proposal, as rules continue to be ironed out.

Liberalisation of the aviation sector, on the other hand, has yielded investment plans from Malaysia's AirAsia and Etihad of Abu Dhabi. Etihad's planned investment in India's Jet Airways has been bogged down by the concerns of Indian regulators over specifics of the deal.

If Singh's government loses the election next year, some reforms, such as supermarket liberalisation, could be reversed.

"There are plenty of sectors where limit is still not exhausted, and it is not that FDI is waiting at the door to get in as soon as rules change," Jyotheesh Kumar, executive vice president at HDFC Securities, wrote in a note.

"There are also doubts that measures taken by this government may be rolled back or reversed if the next government with a different mind-set comes to power."

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