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India tightens foreign borrowing rule for firms

India has tightened overseas borrowing rules, making it harder for less creditworthy and smaller local companies to raise funds.

business Updated: May 19, 2007 23:24 IST

India has tightened overseas borrowing rules, making it harder for less creditworthy and smaller local companies to raise funds, which analysts said would curb soaring capital flows and calm the hot real estate sector.

The finance ministry said in a statement late on Friday that the ceiling has been lowered to 150 basis points over six-month Libor from the earlier 200 basis points for overseas borrowings by Indian companies for maturities between three and five years.

For maturities over five years the ceiling has been reduced to 250 basis points over six-month Libor from 350 basis points.

It said the ceilings had been revised in view of the upgrading of the country's sovereign credit ratings.

"It looks like the move is basically to control capital flows and cool the real estate sector," said DK Joshi, principal economist at credit rating agency, Crisil.

The finance ministry said the use of overseas borrowings for development of integrated townships would also be stopped.

"It has been decided to withdraw the exemption accorded to the development of integrated townships as a permissible end-use of external commercial borrowings," the statement said.

The Reserve Bank of India (RBI) had been trying to cool the real estate sector in its battle against rising inflation and has asked banks to reduce their exposure to the sector.

Rising mortgage rates and a doubling of property prices in major cities in the past two years has lifted home prices beyond the reach of middle-class Indians.

The RBI aims to keep inflation close to 5 per cent this fiscal year and bring it down to 4.0-4.5 per cent over the medium term.

Annual inflation had been running above 6 per cent for most of this year. It hit 6.7 per cent in early 2007, its highest in more than two years.

The RBI has raised its key lending rate five times in less than a year to constrain price pressures. Though it left rates unchanged at a review last month, it said it would act swiftly if conditions warrant.