NEW DELHI: Policymakers have decided to terminate the easy overseas borrowing policy for companies unveiled due to credit crisis last year, as they prepare to battle rising assets and commodity prices and to prevent currency appreciation, which erodes exporters’ profitability.
“We have decided to reimpose all-in-cost ceilings on external commercial borrowings,” a senior finance ministry official said, referring to the Reserve Bank of India and the government. He did not want to be identified.
India is among many countries, including the US, EU and Australia, that are reversing emergency liquidity measures unleashed after the collapse of Lehman Brothers. Borrowing has since become easier. But policymakers are still cautious in reversing rate policies, as they fear it may derail the nascent recovery.
RBI governor D Subbarao in January did away with rules that mandated that companies borrowing overseas with an average maturity of 3-5 years had to do so within 300 basis points over the six-month London inter-bank offered rate, or LIBOR, the benchmark for borrowing and lending in global markets.
ECBs of more than five years had to be within 500 basis points of this benchmark. These will be applicable again from January, after relaxation was once extended to December from June.
“Capital flows have resumed,” Mr Subbarao said during the quarterly policy review last month. “Given the limitations of the economy’s current absorptive capacity, these flows will add to the overall domestic liquidity, further fuelling the asset price build-up. Large capital inflows and asset price inflation have the potential to feed on each other.”
Overseas investors have bought Indian equities for about $15 billion this year and companies have raised $7.1 billion from abroad in the first half of the current financial year. The rupee has appreciated by more than 10% against the dollar while China, the competitor in global markets, managed to keep its currency stable despite calls from the US to ease controls.
Benchmark stock indices are up more than 70%, real estate prices have risen in most cities by about 30% and the rupee gains may lead to losses for exporters, forcing them to cut jobs.
However, the doing away of easy rules could close the much-needed window to raise funds for smaller and medium-sized infrastructure companies which are building roads and power units as the nation faces severe shortage of them, analysts say. “This lowers companies' ability to raise such funds, especially if they are competing with companies from other countries at the same level having similar risk profile,” said Akash Gupt, executive director, PwC. “If lenders are not willing to lend at a lower rate, then it could become an issue for infrastructure and medium-sized companies.”
But officials in the ministry maintain that corporate borrowing during the past one year was anyway in the permissible range, so would not impact much while it protects the nation against future flood of capital when recovery gathers steam. The rollback could also help the government save on potential cost of managing the currency-induced economic problems, officials say.
Inflows impose cost on the government as it has to sterilise them. Dollar flow increases supply of rupee funds, which are then mopped up through bonds to keep high liquidity from causing inflation. The cost of interest payments on those bonds is borne by the government.
Source : The Economic Times