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Curbs on ECBs likely

There could also be a cut in non-resident deposits as the government grapples to attract foreign investment, reports Gaurav Choudhury.

business Updated: Sep 20, 2007 21:56 IST
Gaurav Choudhury

The rupee on Thursday rose to a nine-year high against the US dollar, amid speculation that the government may impose stricter monitoring of end-use external commercial borrowings (ECBs) and a possible lowering of non-resident deposit rates.

Sources indicated that the government was not averse to imposing more stringent monitoring of short-term debt and restricting their end-use.

There could also be a cut in non-resident deposits as the government grapples to attract foreign investment while ensuring the domestic currency does not appreciate beyond a limit where it erodes export competitiveness.

The opinion within the official circles is that a "very large" proportion of ECBs raised by Indian corporate may still be circumventing the end-use norms.

On Thursday, the rupee appreciated sharply and breached the 40-level mark to reach a nine-year high of 39.90 against the dollar. Last month, the government tightened the ECB norms to check foreign currency inflows by imposing a ceiling on its end-use under which foreign debt above $20 million would have to be used for foreign currency expenditure and parked overseas.

The Reserve Bank has identified ECBs as one of the "major contributors to capital inflows". Higher recourse to ECBs was enabled by lower spreads on external borrowings and rising financing requirements for capacity expansion domestically by Indian corporates.

Loans raised by the private sector from international capital markets with maturity of more than three years are classified as ECBs. ECB proposals are approved within an overall annual limit of $22 billion and an individual company ceiling of $500 million fixed by the finance ministry. The limits are fixed keeping in view sectoral requirements and the outcome of balance of payments (BoP) in the medium term.

Within commercial borrowings, there was distinct inclination in favour of overseas commercial bank loans against securitised borrowings, including foreign currency convertible bonds (FCCBs). Finance Minister P Chidambaram in a statement this week said that the focus would be on rationalising the interest rates of non-resident deposits, limiting the level of commercial borrowings and stringent monitoring of the short-term debt.

The RBI's monetary review in July 2007 showed that net ECB funds accounted for about one-third of total net capital inflows in 2006-07.

Officials and analysts, however, believe that the RBI was likely to maintain status quo on the overall interest-rate regime, but could engage in more "active management" of foreign inflows in the short-term to prevent the domestic currency from appreciating beyond a certain limit.

The trend has already been visible in the last few months. RBI's purchases of dollar have increased from $4.42 billion in May to $11.4 billion in July. During the first seven months of the current calendar year RBI has purchased $38.1 billion.

The RBI had also increased the cash reserve ratio (CRR) to 7 per cent in July. A hike in CRR is seen as an attempt to suck out excess liquidity from the system to tackle inflation.