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Chidambaram May Ease India FDI Caps, Seeks Interest-Rate Cut

March 18, 2013

India Finance Minister Palaniappan Chidambaram

Palaniappan Chidambaram, India's finance minister. Photographer: Prashanth Vishwanathan/Bloomberg

India’s finance minister said the nation may ease restrictions on foreign-direct investment and called on the central bank to cut interest rates, as he extends efforts to revive growth in Asia’s third-largest economy.

“Many caps can be removed or certainly relaxed,” and a review of the limits has begun, Palaniappan Chidambaram, 67, said in a March 15 interview in New Delhi. A narrower budget deficit has created space for a rate cut, he said before the central bank’s policy decision tomorrow. He also said Indian companies seem “quite happy” with the rupee at its current level of 54 to 55 per dollar.

The review may herald a sweeping relaxation of the investment caps in about two dozen industries ranging from telecommunications to banking, which would be India’s biggest opening to overseas companies since the 1990s. Chidambaram estimates the country’s economy may need more than $75 billion of foreign capital this year and next to fund a record current- account gap, adding pressure to relax rules.

Ten-year government bonds rose after the minister’s comments signaling he sees room for lower rates. The yield on the 8.15 percent note due June 2022 traded at 7.85 percent in Mumbai from 7.86 percent on March 15, according to the central bank’s trading system. Three-month non-deliverable rupee forwards weakened to 55.24 a dollar after the comments on the currency, according to data compiled by Bloomberg.

‘Completely Irrelevant’

“Some of these caps are completely irrelevant in terms of the changed situation,” said Chidambaram, who became finance minister for the third time in July last year. “We need to clear some of the cobwebs accumulated in India and go out and woo specific business houses.”

Chidambaram has helped to spearhead policy changes to revive a faltering economy. The government since mid-September has permitted more foreign investment in retail and aviation, cut levies on overseas borrowing, curbed fuel subsidies and set up a panel to speed up stalled road, rail and port projects.

“This creates transparency on what is being done and shows that the government is not only serious on continuing with the reforms but also implementing them,” said Leif Eskesen, chief India and Southeast Asia economist for HSBC Holdings Plc in Singapore. “It is important to demonstrate the determination and willingness to move forward on these policies.”

The rupee has appreciated 2.1 percent versus the dollar since the changes began on Sept. 13, to 54.29 per dollar at 11:17 a.m. in Mumbai. It remains down 7.6 percent in the past 12 months, a period when the BSE India Sensitive Index (SENSEX) climbed 10.4 percent.

Exporters Happy

“Both importers and exporters, to the extent I know, to the extent that I have been told, seem quite happy with the rupee between 54 and 55,” Chidambaram said.

The finance minister said he’s trying to identify which of the world’s largest 500 companies have yet to invest in India. He visited Europe, Singapore and Hong Kong earlier in 2013 to court capital inflows.

“We are looking at it in a very focused manner,” he said in the interview. He added that ways to attract portfolio inflows of a “longer tenure” are being considered.

Foreign-direct investment fell 34 percent to $22.8 billion in 2012, according to government data.

Record Deficit

The deficit in the current account, the broadest measure of trade, widened to an unprecedented $22.3 billion in the quarter ended Sept. 30, or 5.4 percent of gross domestic product.

Chidambaram in the Feb. 28 budget narrowed the fiscal gap to 5.2 percent of GDP in the year to March 31, 2013, seeking to avert a credit-rating downgrade and reduce inflation risks.

Consumer prices are rising almost 11 percent, and inflation continues to be “a worry,” Chidambaram said.

He set a budget-deficit goal of 4.8 percent of GDP for 2013-2014, relying on higher tax revenue and asset sales to help pay for increased welfare spending before polls due by 2014.

The plan is credible and the threat of Asia’s No. 3 economy losing its investment-grade status has “clearly receded by quite a few yards,” the finance minister said.

The Reserve Bank of India should “take comfort” from the effort to contain the deficit, Chidambaram said.

“We have argued on the government’s side that there is a case for lowering the policy rates,” he said. “We express our view but the governor has to take the call.”

Rate Cut

Reserve Bank Governor Duvvuri Subbarao said last week the administration “firmly embraced” fiscal responsibility in the budget. Credit Suisse Group AG has said the plan’s revenue assumptions are “too high.”

Thirty of 35 economists in a Bloomberg News survey predict Subbarao will cut the benchmark repurchase rate to 7.5 percent from 7.75 percent, the second reduction this year. The rest expect no change. The decision is due at 11 a.m. tomorrow.

Still, Moody’s Investors Service said in a note today that India’s food inflation is exacerbating macroeconomic imbalances and is “credit negative.”

India’s economy will expand 5 percent in 2012-2013, the slowest pace in a decade, hurt by cooling investment and a drop in exports, statistics agency forecasts show. While that’s better than the U.S. and Europe, it trails China and is below India’s average of about 8 percent in the past 10 years.

The current-account shortfall has triggered memories of India’s crisis in 1990-1991, when the country airlifted gold to pledge as collateral for a loan from the International Monetary Fund after foreign reserves slid.

Political Hostility

The nation at the time devalued the rupee, tackled government monopolies, cut tax rates and let foreign companies take majority stakes in sectors including automobiles and pharmaceuticals to rescue the economy.

The current efforts to encourage wider foreign participation may face opposition.

The Congress Party-led ruling coalition lost its majority in parliament last year when a key ally withdrew support over the decision to allow overseas businesses such as Wal-Mart Stores Inc. to set up supermarkets.

Global retailers have yet to take advantage of the rules.

AirAsia Bhd. (AIRA), Southeast Asia’s biggest budget airline, has said it plans to start a venture in India following the liberalization of aviation investment limits.

The Cabinet has approved bills to allow overseas companies to invest in the pensions industry for the first time, and hold as much as 49 percent of insurance businesses. The legislation needs the assent of lawmakers.

“We have to find $75 billion and that’s not easy,” Chidambaram said, referring to the money needed to finance the current-account gap. “We have to really motivate the investor to continue to invest in India.”

To contact the reporter on this story: Unni Krishnan in New Delhi at

To contact the editor responsible for this story: Stephanie Phang at

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