India to Review Cap on Overseas Borrowing.

NEW DELHI --India's government will review the cap on overseas corporate borrowings at the end of September, underscoring the growing demand from local companies to raise funds at relatively cheaper rates overseas.

R. Gopalan, India's economic affairs secretary told reporters that the issue will be considered at a meeting at the end of this month when asked if the government would review the limits on external commercial borrowing.

The government currently allows overseas borrowings of up to $30 billion. However, that limit is expected to be reached fast as companies shy away from the high cost of domestic borrowing costs. U.S. and other European countries have near-zero interest rates in a bid to support weak economic growth.

The review comes even as the government remains cautious on allowing foreign fund inflows, fearing that these might cause sharp currency volatility and lead to financial instability in a crisis.

At a separate event, Finance Minister Pranab Mukherjee said central banks in emerging economies have been forced to raise interest rates repeatedly as they battle high inflation, exposing them to volatile capital flows.

"An issue of immediate concern for emerging economies is managing large capital flows," he said. "Large and volatile capital flows to emerging markets can be destabilizing as they lead to high exchange rate volatility and in some cases make it incumbent to maintain high levels of foreign exchange reserves as an insurance against sudden and large-scale flight of international capital."

India has been wary of such fleet-footed investors. The government encourages foreign direct investments in several key infrastructure sectors but limits foreign fund investments in local debt.

Current regulations cap foreign investments in government bonds at $10 billion, half of which must be in bonds maturing in more than five years. In corporate bonds, foreign investors are permitted to invest up to $40 billion, including $25 billion in securities issued by infrastructure companies.

Source : online.wsj.com