Raising the investment limit for foreign institutional investors (FIIs) from $20 billion to $25 billion is credit positive for the Government of India (GoI) because it will increase the foreign investment in government securities over the next several months, according to Moody’s Investors Service.
This, in turn, will accelerate India’s incipient growth by helping to stabilise the domestic market interest and currency rates, the credit rating agency said.
“And, because the revised investment limit is small enough not to raise foreign ownership of government debt much beyond 10 per cent of total government debt outstanding, the sovereign’s exposure to fluctuations in international risk appetite remains limited,” it said.
Last Wednesday, the Reserve Bank of India (RBI) had raised the amount of Indian sovereign securities that foreign institutional investors can buy to $25 billion from $20 billion, one of several RBI measures aimed at reviving growth and correcting macroeconomic imbalances.
Moody’s observed that last year the Reserve Bank of India had raised the interest rates to curb inflation and currency volatility, but higher interest rates have constrained India’s GDP growth and lowered banks’ profitability and asset quality.
“Although exchange rate pressures have subsided this year and inflation has cooled, uncertainty around global commodity price trends and the prospects of rising food inflation owing to a weak monsoon season in June and July, will preclude the RBI from implementing significant monetary stimulus this year,” it said.
Instead, Moody’s expects the RBI to exercise its supervisory and regulatory authority to nudge growth towards sustainable acceleration.