By Cherian Thomas Oct. 8 (Bloomberg) -- India may allow more overseas investments in corporate and government bonds and ease overseas borrowing rules for local companies to boost dollar inflows and shore up the rupee from a six-year low. The finance ministry is considering a proposal to raise the limit on holdings of government bonds by overseas investors from $5 billion and that on corporate bonds from $3 billion, said an official who did not want to be named. A record $9.84 billion sell-off of Indian equities by foreign investors sent the rupee down by 19.2 percent this year, the biggest drop since 1991, draining cash from the financial system and increasing borrowing costs. Finance Minister Palaniappan Chidambaram said today the government will take steps to ``provide liquidity.'' ``It is absolutely necessary to boost dollar inflows,'' said Tapan K. Bhaumik, economist at New Delhi-based JK Organisation, which has investments in tires, cement and paper. ``Else the slide in the rupee will continue.'' The Federal Reserve, European Central Bank and four other central banks today lowered interest rates in an emergency coordinated effort to ease the economic effects of the financial crisis. The U.K. earlier said it will give its banks an unprecedented 50 billion-pound ($87 billion) government lifeline and emergency loans from the central bank to prevent a collapse of its financial system. ``We see in the U.S., in Europe, economies really in the hospital,'' India's Trade Minister Kamal Nath said in New Delhi. ``In India, with strong economic fundamentals, we have the confidence to tide over this global financial crisis.'' Reduced Cash The Reserve Bank of India on Oct. 6 reduced the cash reserve ratio to 8.5 percent from 9 percent effective Oct. 11 to inject 200 billion rupees ($4.2 billion) into the financial system. On the same day, the capital-markets regulator lifted curbs on overseas investors imposed a year ago by removing a requirement that forced investors to register in India before buying shares. The Reserve Bank may cut the amount of cash banks need to set aside as reserves again if the financial crisis triggered by the collapse of lenders in the U.S. and Europe deepens, Goldman Sachs Group Inc. and JPMorgan Chase & Co. said Oct. 6. Chidambaram told investors this week that 17 years of economic changes in India have helped build a system that ``can stand any storm that blows across the world.'' The rupee declined to 48 per dollar, the lowest since January 2003, at the close of trading in Mumbai today, from 47.925 yesterday. The decline in India's currency this year is the worst since India was forced to devalue the rupee when a balance-of- payments crisis forced it to pawn gold from its reserves. 1991 Crisis The 1991 crisis also prompted Prime Minister Manmohan Singh, then finance minister, to introduce free-market measures aimed at cutting red tape, removing state-enforced capacity caps on steel and cement makers, and allowing overseas companies to set up operations locally to boost economic growth. India's economy has grown at a record average pace of 8.8 percent since 2003, the second-fastest after China among the world's major economies. The growth was fueled by investments, which as a percentage of gross domestic product will touch a record 37.5 percent in the year ending March 31, the economic advisory council to Prime Minister Singh said in July. Still, foreign investors have dumped more than half of the record $17.2 billion of Indian stocks they bought last year, fearing the collapse of the global financial system will send the world economy into a recession. Stocks Slump The Sensitive Index fell 3.1 percent to 11,328.36 today, extending a 44 percent decline since January. Call money rates, which have averaged 8.24 percent in the past six months, closed at 10.5 percent in Mumbai. ``I want to assure everyone that it's not a reflection of the strong fundamentals that India has,'' Nath said. ``India has perhaps one of the strongest economic fundamentals in the world.'' India got $14.6 billion of foreign direct investment in the April-August period this year, more than double the flow in the same period in the previous year, Nath said. To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net.

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