Mumbai: The Reserve Bank of India’s (RBI) move to control capital inflow through external commercial borrowings (ECB) may have come in a bit earlier than expected and signals more stringent measures to control capital flow and tightening liquidity in coming days, according to the bankers and corporates.
They cite factors like resources raised through ECB are yet to pick up, there is still abundant liquidity in the system and at 10%, the domestic credit growth stands muted, the trends in the impact on bonds and currency has also been limited to prove the point that such capital controlling measures by the central bank has happened early.
Anil Surekha, executive director (finance), Ispat Industries said, “The international market for ECBs and FCCBs has still not caught up. RBI should have continued the relaxation for another three months till March 2010, which would have helped the corporates. There will be some impact, as now it will not be easy for corporates to raise money in the international market and only those corporates with very good reputation in the international market can raise money there.” “However, the positive thing is is that the norms will help filter out weaker credits from overseas borrowing. As management of capital inflows becomes challenging, we expect to see such measures in the coming months,” said Rohini Malkani, economist, Citi. The bank thinks that the RBI’s goals would be to build forex reserves; allow for some rupee appreciation to combat inflation; and there would likely be a reversal of some measures taken last year. “While we do not expect punitive controls (eg Brazil), we do expect direct liquidity control measures. These include a CRR hike; tighter banking capital norms; a reduction in interest rates on NRI deposits; and measures to encourage capital outflows,”the bank said.
However, a few bankers say they may have tightened ECB norms to indirectly boost domestic credit growth rather than to just curb capital inflows, analysts say. The RBI had said some concessions on overseas borrowing for Indian firms introduced during the global credit crisis will be withdrawn from January 1 even as it eased rules for the infrastructure and telecoms firms raising funds from abroad. “This is a positive measure for banks' credit growth because some of the corporates will return back to Indian banks and this will help improve the credit demand locally,” said Rupa Rege Nitsure, chief economist at state-owned Bank of Baroda As the domestic credit growth is aneamic, that could be another reason, the RBI may have taken this step.” Indian banks’ credit growth has slowed to about 10% between April and mid-November from 27% a year ago as companies opted for non-bank sources of funds amid surplus liquidity, cutting demand for commercial loans. The central bank has said it expects credit growth in the fiscal ending March 2010 to touch 18%, a number some economists say is probably a tad optimistic. “The 18% target is quite ambitious, we may not reach there but about 15-16% looks possible,” said Indranil Pan, economist at Kotak Mahindra Bank Ltd. Wednesday’s changes in overseas borrowing rules will limit the ability of firms to borrow funds abroad and then repatriate them, as well as to buy back their foreign currency convertible bonds under the automatic route and approval route.
Whether the rule change has any significant impact or not depends on how much money has been raised until now above the all-in-cost ceiling. We do not have any data on that," said Anubhuti Sahay, economist at StanChart Bank. Impact on capital flows is expected to be limited as bulk of the inflows into India is through the stock market, analysts said. "There aren't many opportunities for investors except in emerging market economies like India, so they are just parking those excess funds here," added Bank of Baroda's Nitsure. So far in 2009, foreign funds have pumped in a net $16 billion worth of funds into the local equity market, but in contrast the debt inflows stand at just $1.4 billion
Source : Financial Express