Singh Debt Cap Doubles for Foreign Buyers to Finance Roads: India Credit

India lifted the cap on foreign investment in bonds for the first time in 18 months as Prime Minister Manmohan Singh seeks capital for building roads and power plants in a nation ranked below war-ravaged Ivory Coast and Sri Lanka for the quality of infrastructure.

The limit on government bonds was doubled to $10 billion, the Ministry of Finance said late yesterday. The money can only be used to buy sovereign debt due in more than five years. Singh’s administration also allowed overseas investors to buy $5 billion more obligations with similar maturities sold by infrastructure companies, boosting foreign investment in corporate debentures to $20 billion.

International investors, seeking to participate in the second-fastest pace of economic growth in Asia and reap higher yields than in the U.S., more than doubled holdings of India’s government and corporate debt this year to $17.2 billion as of Sept. 22, data from the Securities & Exchange Board of India show. Two-year sovereign notes yield 657 basis points more than similar-maturity Treasuries, about the most since Oct. 15, 2008.

“The thought process seems to be to try and draw in real investors,” Ananth Narayan G., the head of South Asian currency and bonds trading at Standard Chartered Plc in Mumbai, said in an interview yesterday. “It’s probably trying to get in pension funds, insurance money.”

Project Spending

India plans to double spending on building infrastructure projects to $1 trillion in the five years to 2017, according the country’s Planning Commission. The South Asian nation is ranked 89 out of 133 nations for its infrastructure, according to the World Economic Forum’s Global Competitiveness Index.

The last time India granted more quotas was in March 2009, when money fled emerging nations after global credit markets seized up. The government raised the ceiling on foreign investments in sovereign bonds to $5 billion from $3.2 billion in June 2008, while increasing the cap on corporate-debt investment to $15 billion from $6 billion in March 2009, according to a statement on the website of the Mumbai-based Securities & Exchange Board.

“The corporate debt market needed to be opened up for infrastructure investments to happen in a meaningful way,” said Indranil Pan, chief economist at Mumbai-based Kotak Mahindra Bank Ltd.

Holding Back Growth

Singh wants to tap private financing for at least half of the $1 trillion of construction projects targeted in the five years ending March 2017. The inadequacy of the nation’s utilities and transport network shaves 2 percentage points from growth, the Finance Ministry estimates. The economy has expanded an average 8.5 percent in the last five years.

The government plans to more than double spending to 20.5 trillion rupees to build ports, airports and other facilities in the five years ending March 2012 from the previous five-year period, according to a Planning Commission document released in March. Private companies may account for about 36 percent of the nation’s total spending on such projects between April 2007 and March 2012, versus 25 percent in the previous five-year period.

India’s 10-year bonds advanced after the new caps were unveiled and the government reduced its borrowing plan, pushing yields to the lowest level in more than a month yesterday. The yield on the 7.8 percent note due May 2020 fell 4 basis points, or 0.04 percentage point, to 7.90 percent, the lowest level since Aug. 17. The rupee lost 0.2 percent to 45.66 to a dollar.

‘Positive’

“The near-term impact will be positive on the rupee as and when the inflow comes into the country,” Dhawal Dalal, the head of fixed-income at DSP Blackrock Investment Managers Pvt. that oversees the equivalent of $5.2 billion, said in an interview yesterday. “It will be positive for banking liquidity as well.”

The increase in the cap may also help the government reduce its current-account deficit. The gap widened to $13 billion in the first quarter as an accelerating economy boosted imports of goods and machinery. The shortfall will expand this year, central bank Governor Duvvuri Subbarao said at a seminar in Buenos Aires on Sept. 3.

“If the government can attract foreign institutional investor flow in infrastructure, which is long-term money, it is going to help the development of infrastructure in the country in a big way,” DSP Blackrock’s Dalal said.

India’s 10-year bond rate is the highest among major economies except Brazil, where similar-maturity notes yield 12.2 percent. Comparable securities offer 7.61 percent in Russia and 3.23 percent in China and 2.54 percent in the U.S., according to data compiled by Bloomberg.

Yield Spreads

The difference in yields between India’s debt due in a decade and 10-year U.S. Treasuries widened to 541 basis points yesterday from 522 a week ago. The measure, which has averaged 318 since 2000, reached a two-year high of 556 on Aug. 26.

Overseas investors have pumped almost $17 billion into Indian equities this year, 60 percent more than in the same period of 2009, according to the Securities and Exchange Board of India. Accelerated inflows of overseas capital helped the rupee strengthen 3.1 percent against the dollar this month, the best performance among Asia’s 10-most traded currencies after South Korea’s won.

“The strong capital inflows will help ease the cash crunch in the coming months,” SBI Funds’ Munot said. “That will boost short-term debt prices, and investors who already own them will gain.”