By Rafael Nam and Devidutta Tripathy
MUMBAI/NEW DELHI, July 17 (Reuters) - India's relaxation offoreign investment rules, aimed at drawing funds needed to turnaround slowing economic growth and support a crumbling rupee,barely lifted markets on Wednesday due to doubts whetherlong-term inflows would materialise anytime soon.
Prime Minister Manmohan Singh eased FDI rules late onTuesday for several industries, including insurance andtelecoms, although some of the liberalisation measures fellshort of expectations or came with caveats. (For Factbox doubleclick on )
The long-pending move to increase the foreign directinvestment (FDI) cap in insurance from 26 to 49 percent, forexample, still needs approval from parliament, where a bill hasbeen stuck for months.
The measures came a day after the central bank mounted adefence of the rupee by tightening liquidity and liftingshort-term interest rates, in order to make speculation againstthe currency more difficult.
Those moves helped to slightly steady a currency that haslost 9 percent against the dollar since the start of May, makingit the worst performer among emerging Asian currencies trackedby Reuters.
But they also sent bond yields soaring and raised worriesthat the increased costs to borrowers will crimp growth alreadyat a decade low of 5 percent.
"FDI easing only makes it easier for foreign investors toput their money in India, but it doesn't change the fundamentalsthat determines whether it is a good idea to put money in Indiain the first place," said Nizam Idris, head of fixed income andcurrency strategy at Macquarie in Singapore.
Worryingly for investors, Singh's weak coalition governmenthas struggled to push through reforms and has limited firepowerfor further measures as it faces elections by May.
Among the steps announced on Tuesday, the foreign investmentcap in telecoms, which stood at 74 percent, was removed. But themeasure was not expected to draw fresh entrants as thecut-throat industry is already crowded, and plagued byregulatory uncertainty.
Instead, existing foreign operators such as Vodafone GroupPlc, Telenor ASA and Sistema may opteventually to buy out their local partners.
"I'm not aware that there are any foreign companies who havesaid that they are hindered because the country doesn't allow100 percent FDI," said Mahesh Uppal, director at telecomsconsulting firm Com First (India).
"I think resolution of regulatory issues would be far moreimportant for any investor, foreign and Indian," he said.
Indian stocks were up about 0.6 percent on Wednesday, butBharti Airtel and Idea Cellular gave upinitial gains to fall later in the session, although RelianceCommunications Ltd was up 1 percent.
Having opened steadier than Tuesday's close of 59.31/32 perdollar, the rupee went on to ease slightly to 59.40/41.
It hit a record low of 61.21 to the dollar on July 8, as asea-change in global investment trends over the past few monthshas seen funds flow out of emerging markets, rendering thosewith high current account deficits, like India, particularlyvulnerable.
The 10-year bond yield, however, continued torise, gaining 5 basis points to 8.12 percent after yields surged 52 bps on Tuesday.
The RBI's tightening measures also led to a surge inredemption requests for mutual funds, forcing the central bankto provide a special funding facility for them in a move lasttaken during the financial crisis in 2008.
IMPLEMENTATION DEFICIT
Although the government hopes its latest reforms attractlong term capital flows, previous measures have had mixedresults, and FDI fell to $36.9 billion in the fiscal year endingin March from $46.6 billion the previous year.
A move last September to allow foreign direct investment insupermarkets has not attracted a single proposal, as rulescontinue to be ironed out.
Liberalisation of the aviation sector, on the other hand,has yielded investment plans from Malaysia's AirAsia and Etihad of Abu Dhabi. Etihad's planned investment in India'sJet Airways has been bogged down by the concerns ofIndian regulators over specifics of the deal.
If Singh's government loses the election next year, somereforms, such as supermarket liberalisation, could be reversed.
"There are plenty of sectors where limit is still notexhausted, and it is not that FDI is waiting at the door to getin as soon as rules change," Jyotheesh Kumar, executive vicepresident at HDFC Securities, wrote in a note.
"There are also doubts that measures taken by thisgovernment may be rolled back or reversed if the next governmentwith a different mind-set comes to power."