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
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
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
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."