Indian Prime Minister Narendra Modi

Central bank deals crippling blow to India's infrastructure hopes

1 September 2014 | By GCR Staff

The Reserve Bank of India (RBI) has banned the country's financial sector from buying bonds issued to pay for infrastructure work.  

The decision is a blow to the government of Narendra Modi, which won a landslide victory in the Indian elections in May after promising to implement an ambitious infrastructure programme. If the work is to be carried out, it will require a huge injection of capital: according to accountant KPMG, it will take $2 trillion to meet the government's pledges on housing alone.  

The government had encouraged banks to pump money into the sector by, in effect, taking any spent on the bonds off their balance sheets. 

The RBI took this action because it wants to stop circular trading, that is banks buying bonds issued by other banks. Rather it is looking for capital to be provided by institutional investors, such as insurance companies and pension funds. 

The government had been looking to raise between $8.3bn and $9.9bn in infrastructure bonds in the present financial year, however this now looks unlikely.  

Shashikant Rathi, head of investments and capital markets at Axis Bank, said “Banks are the market makers, the largest investors and underwriters of corporate bonds. If banks are not allowed to invest in these senior infrastructure bonds then other investors like mutual funds would be skeptical buying them since they wouldn't be sure of being able to sell them if liquidity need arises.” 

Modi is today exploring other sources of investment in a meeting with Japanese prime minister Shinzo Abe.  Japan is expected to make a significant contribution to funding India's infrastructure plan, as well as tightening defence co-operation and agreeing terms for the sale of rare earth minerals from India. India will also look to announce some progress in its negotiations with Japan for nuclear cooperation.   

The International Finance Committee is set to raise $2.5bn for Indian infrastructure. India have rcently invested $1.4bn in a new metro line in Nagpur and have announced a $1bn line of credit for Nepalese infrastructure. France have also offered over $1bn worth of investment to India. 

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