Last Wednesday, the Reserve Bank of India (RBI) raised the amount of Indian sovereign securities that foreign institutional investors can buy to US$25bn from $20 billion, one of several RBI measures aimed at reviving growth and correcting macroeconomic imbalances.
Raising the limit for foreign institutional investors is credit positive for the Government of India (Baa3 stable) because it will increase foreign investment in government securities over the next several months, which, in turn, will accelerate India’s incipient growth by helping to stabilize domestic market interest and currency rates. And, because the revised investment limit is small enough not to raise foreign ownership of government debt much beyond 10% of total government debt outstanding, the sovereign’s exposure to fluctuations in international risk appetite remains limited.
Other measures the RBI has made over the past week include easing lending conditions for infrastructure projects and increasing capital requirements on domestic systemically important banks.
Stoking lending activity in the infrastructure sector does carry risks. During 2004-10, certain infrastructure sectors received considerable amounts of credit, which has resulted in banks recording increases in nonperforming assets and banks generally reporting weaker asset quality (see exhibit).
The above is extracted from "Moody's Credit Outlook", July 28, 2014 issue.
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