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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 yesterday 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.
The long-pending move to increase the foreign direct investment (FDI) cap in insurance from 26 to 49%, 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.
“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.”
India’s broader NSE index rose 0.3% yesterday, but Bharti Airtel and Idea Cellular gave up initial gains to fall.
The S&P BSE Sensex added 0.5% to 19,948.73 at the close in Mumbai, after falling the most since July 3 on Tuesday. Hindustan Unilever, India’s biggest home-products maker, soared 9.9%, pacing a rally among consumer stocks. Cigarette maker ITC, which has the highest weighting on the index, and Tata Consultancy Services advanced to all-time highs.
Investors are shifting funds to consumer stocks from banks after the Reserve Bank of India raised two interest rates to steady the rupee on July 15, according to Nirakar Pradhan, who manages $590mn as chief investment officer at Future Generali Life Insurance in Mumbai. The 11-member S&P BSE FMCG Index climbed to a record yesterday even as the S&P BSE Bankex, a gauge of 13 lenders, closed at a 10-month low.
Unilever offered Rs600 a share to raise its majority holding in the Indian subsidiary to 75% from 52%. The open offer, which closed on July 4, increased Unilever’s holding to 67% as some shareholders opted not to sell. The Mumbai-based company has a 4.3% weighting in the Sensex, data compiled by Bloomberg show.
ITC rallied 2.3% to Rs368.35, a record. Tata Consultancy rose 1.8% to all-time high of 1,678.5 rupees.
HDFC Bank, India’s biggest lender by value, declined 2.3% to Rs662.9 after exchange filings showed that net bad loans and provisions climbed in the three months ended June. Rival ICICI Bank lost 2.3% to Rs980.25. State Bank of India, the nation’s largest by assets, retreated 1.2% to Rs1,806.7.
The rupee fell, erasing earlier gains, as investors favoured the dollar before Federal Reserve Chairman Ben S Bernanke testifies to Congress. Bond yields dropped after the central bank signaled the rates are too high.
Bernanke appeared before the House Financial Services Committee yesterday and will appear before senators today to present the semi-annual monetary policy report. The rupee has rebounded 3.1% from a record low of 61.2125 touched July 8 as Bernanke said last week the US would need accommodative monetary policy for the foreseeable future and as the Reserve Bank of India raised two interest rates to support the currency.
“It seems unlikely that Bernanke’s comments will be perceived as dovish as last week,” analysts at Brown Brothers Harriman & Co, including New York-based Marc Chandler, wrote in a report yesterday. “The rupee has stabilised after this week’s RBI measures, but remains vulnerable to a turn in emerging-market sentiment.”
The rupee declined 0.1% to 59.3450 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It touched 59.0450 earlier, the strongest level since July 1. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed two basis points, or 0.02 percentage point, to 12.52%. The Dollar Index, which tracks the greenback against six major counterparts, rose 0.2%.
The Reserve Bank of India increased the marginal standing facility rate and the bank rate to 10.25% from 8.25%, according to a July 15 statement. The monetary authority said also that it will sell Rs120bn ($2bn) of bonds maturing between 2017 and 2030 through open- market operations tomorrow.
The RBI has also began capping the amount it lends to commercial banks through the daily repurchase window to around 750bn rupees. This compares with an average 872bn rupees borrowed each day this year through July 15, according to central bank data.
The measures pushed the interbank call money rate as much as 295 basis points higher to 9.25% yesterday, the biggest gain since March 2012, and contributed to the failure of a weekly treasury bill auction. The RBI rejected bids worth Rs293bn ($4.9bn) received for a combined Rs120bn of notes offered, it said in an e-mailed statement.
“The market moves have been a knee-jerk reaction to the RBI’s steps, and I think within a week or so things should settle down, when the market would have a clearer perspective of how liquidity will be,” said N S Venkatesh, the Mumbai-based head of treasury at IDBI Bank.
The yield on the 8.15% bonds due June 2022 fell three basis points to 8.16%, after surging 52 basis points on Tuesday, the biggest yield increase for a benchmark 10- year security since January 2009, according to the central bank’s trading system. The yield on the 7.16% 2023 note, which fell two basis points today to 8.05% after the bill-sale results, is likely to drop as low as 7.90% in around 10 days, Venkatesh predicts.
The RBI will conduct special three-day repos from tomorrow to add as much as Rs250bn at 10.25% so banks can meet the liquidity needs of mutual funds, the monetary authority said in a statement yesterday. The facility will be temporary, it added.
India’s government has proposed easing foreign-direct investment limits in some industries as part of measures to draw capital inflows and revive economic growth. Among the decisions taken at a meeting led by Prime Minister Manmohan Singh was a plan to allow overseas investors to own all of a phone carrier, Commerce Minister Anand Sharma told reporters on Tuesday. The changes would also permit foreign investment in defense production exceeding the current 26% cap if India gains access to modern technology.
“The measures are good in the long term, but may not provide any dollars in the short term,” said Samiran Chakraborty, an economist at Standard Chartered in Mumbai. Three-month onshore rupee forwards fell 0.5% to 60.75 per dollar, data compiled by Bloomberg show. Offshore non- deliverable contracts dropped 0.6% to 60.73.
Meanwhile, the 10-year bond yield fell 3 basis points to 8.04%, 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 $36.9bn in the fiscal year ending in March from $46.6bn 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.”
Sectors in which FDI norms are eased
India has relaxed foreign direct investment (FDI) rules across several industries, including telecoms, single brand retail and oil and gas, in a bid to lure capital inflows, prop up a sliding currency and accelerate growth. The changes will have to be approved by India’s cabinet before they become law, although that is seen as a formality. Here are the sectors in which FDI caps will be revised:
Telecoms
The FDI cap on the telecoms sector was raised to 100% from 74%. While a foreign company can buy up to a 49% stake in an Indian phone carrier without seeking approval from the Foreign Investment Promotion Board (FIPB), any investment beyond that will need the country’s foreign investment regulator’s nod.
Petroleum and natural gas
The FDI cap for the sector was left unchanged at 49%, but foreign investment up to 49% will no longer require FIPB approval.
Insurance
Foreign investment up to 49% in insurers will not require the government’s approval. The foreign investment limit in the sector is currently capped at 26%. A bill to raise the cap to 49% is stuck in parliament.
Defence production
There was effectively no change in the FDI cap of 26% in the defence sector, although trade minister Anand Sharma said a cabinet panel would consider any FDI proposal for investment above 26% in state-of-the-art technology.
Retail
FDI up to 49% in the single-brand retail sector will no longer require the FIPB’s approval. The government also said it will issue clarifications soon on its FDI policy for supermarkets.
Commodity, power and stock exchanges
Foreign investment of up to 49% will not require the government’s approval.
Asset reconstruction companies
India will allow FDI up to 49% with no government approval, but foreign investors will need FIPB approval to buy a bigger stake in an Indian asset reconstruction company.
Courier services
Foreign investors can now invest up to 100% in the courier services sector and will not need government approval.
Credit information companies
India will allow up to 74% FDI in credit information companies, with no need to seek government approval for investments up to that level.
Civil aviation and media
The government left FDI caps in civil aviation and media unchanged at 49% and 26% respectively.