ECB annual cap raised to $40 bn .

NEW DELHI: Indian firms can borrow up to $40 billion this year from overseas markets, with the government moving in to ensure easy availability of funds for the rapidly recovering economy.

The high level co-ordination committee on external commercial borrowings decided in principle to raise the annual indicative ceiling to $40 billion for 2010-11 from $35 billion last year, a government official said.

The higher limit will allow Indian corporates to access cheaper funds abroad at a time when interest rates are set to harden in the domestic market due to the central bank’s monetary tightening measures.

“Cost of overseas borrowing (inclusive of all costs such as hedging and other transaction costs) comes to 7-8 % for companies with good balance sheets and is much lower than the domestic credit cost of 9-11 %,” said Arvind Parakh, finance director at Jindal Stainless.

The higher limit will come handy for infrastructure companies including those in telecom sector, which are expected to borrow heavily once the ongoing 3G auctions are complete.

The government has allowed successful 3G winners, which are expected to pay nearly $10 billion, to refinance their domestic debt through ECBs.

The higher limit comes despite concerns that capital inflows into emerging markets could go up sharply, creating exchange rate and monetary management issues.

The companies are allowed to access overseas debt on a first-come-first-served basis within the $40 billion limit. But actual borrowing in the year could exceed the $40 billion limit as some dollar funds can also come through the automatic route, where prior approval from RBI is not needed.

Exporters have already sounded an alarm as the rupee has appreciated to 44.165 on April 15, the highest level since September 2008.

The government seems to be of the view that credit needs and not capital flows is the more urgent issue now. Even the limit on foreign institutional investments into corporate bonds is likely to be hiked to $20 billion from $15 billion.
Most economists seem to agree with the government’s assessment of the situation.

“Coming 7-8 months will be rocky in wake of incidents such as Greece and it is sensible to increase limits to buffer for these. Post-December situation may stabilise in the G-8 economies and then there could be a phase of rise in inflows,” said Abheek Barua, chief economist at HDFC Bank.

Domestic credit grew by around 17% in 2009-10 as against RBI’s revised projection of 16%, but lower than the 17.5% growth in 2008-09.

Despite a muted credit growth, there is apprehension that large government borrowings could put pressure on interest rates and crowd out private borrowers. The government is expected to borrow Rs 3,81,000 crore in the current fiscal.
Yields on benchmark 10-year bond has firmed up to nearly 8% in recent months in anticipation of the impact of government borrowing and monetary tightening.

“The banks are still being cautious in lending long-term despite a comfortable liquidity situation and overseas credit is expected to available at lower cost remain for some time till there is full pick up in US economy,” Mr Parakh added.
Though the government has hiked the overseas borrowing limit, it is building policy flexibility to respond quickly in case capital flows accelerate.

An auction regime for overseas debt is one such mechanism to ensure that only the most needy take foreign debt.

Source : The Economic Times