India lifts cap on foreign investment in bonds for first time in over a year

India has lifted the cap on foreign investments in government bonds as the government seeks financing for its infrastructure projects. The lifting comes as the first in more than a year as the country’s Prime Minister seeks capital for the construction of roads and power plants. Currently, India is positioned below countries such as war ravaged Ivory Coast and Sri Lanka in terms of infrastructure quality.

The Indian government doubled the limit on bonds to $10 billion, the Finance Ministry stated in a statement last week. However, the funds can only be utilized in the purchase of sovereign debt due in more than five years. The Indian Prime Minister, Manmohan Singh’s government has as well allowed overseas investors to purchase $5 billion more obligations with similar maturities sold by infrastructure firms, bolstering permitted foreign investments in corporate debentures to $20 billion.

Data from the Securities & Exchange Board of India indicate that major global investors have more than doubled holdings of India’s government and corporate debt this year to $17.2 billion as of September 22nd 2010, as the firms seek to take part in India’s fast paced economic growth and reap higher yields. Two-year sovereign notes yield 657 basis points more than similar-maturity Treasuries, about the most since Oct. 15, 2008.

Analysts believe the process is aimed at attempting to draw in real investors, as well as get pension funds and insurance money amongst others. The government of India is planning to double its spending on building infrastructure projects to $1 trillion in the five years to the year 2017. The plans are being outlined by India’s Planning Commission.

According to the World Economic Forum’s Global Competitiveness Index, India is ranked 89 out of 133 nations for its infrastructure. The Indian government allowed more quotas back in 2009 March, when funds left emerging nations due to the global financial meltdown.

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.

Analysts believe the corporate debt market had to be opened up for infrastructure investments to happen in a meaningful way. The Indian Prime Minister wants to tap private financing for at least half of the $1 trillion of construction projects targeted in the five years ending March 2017.

26 Sep 2010.