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New $ windows not enough

Companies can now borrow cheaper funds abroad to pay off existing loans at home, but the big-bang booster dose that markets expected would buoy the economy never came. Gaurav Choudhury writes. De-coded | In numbers

business Updated: Jun 26, 2012 23:03 IST
Gaurav Choudhury

The Reserve bank of India (RBI) on Monday announced a handful of measures to stem the rupee’s slide and boost dollar inflows into India. A lowdown on what it means for the government, the economy and companies.

How will the RBI announcement benefit Indian companies?
The RBI has eased external commercial borrowing (ECB) limits for Indian companies. Companies can now borrow up to $10 billion (about Rs. 57,000 crore) from foreign banks to repay outstanding loans taken from banks at home. The overall annual ECB limit for Indian companies, however, remains unchanged at $30 billion (about Rs. 171,000 crore based on current exchange rates).

Which companies can avail this window?
This applies to Indian companies in the manufacturing and infrastructure sectors that have foreign exchange earnings.

What is the rationale behind this move?
Many firms, squeezed by high interest rates, costly inputs and flat revenue growth, are struggling to repay loans taken from Indian banks. The new measures will give them a window to borrow from overseas banks at much cheaper rates. This will also bring down interest payouts significantly, besides getting in dollars into India to stem the rupee’s slide.

So, does it mean that a company can borrow foreign banks to pre-pay existing loans? http://www.hindustantimes.com/Images/Popup/2012/6/27-06-12-biz-01.jpg

Yes. The objective of this move is two-fold: to bring down interest costs for Indian companies by replacing expensive rupee loans with cheaper foreign currency loans and bring in dollars into India to prevent the rupee from falling further.

What’s the difference in interest rates between foreign loans and those taken from banks at home?
International bank lending is guided by the London Inter-bank Offered Rate (LIBOR), the benchmark rate at which banks borrow and lend among each other to bridge the liquidity demand-supply mismatch. ECBs or overseas borrowings are usually about 4 percentage above the LIBOR rate, but still much lower than existing interest rates that banks at home charge from Indian companies.

Will it help all firms?
The move will mostly help large companies. Foreign banks insist on credit rating of firms as a necessary condition for lending. This would imply that only top-rated large Indian companies can avail of the fresh window of securing cheaper foreign exchange loans.

What measures did RBI announce regarding government bonds?
The RBI has raised the ceiling of foreign institutional investors (FIIs) on government bonds by $5 billion (about Rs. 28,500 crore) to $20 billion (about Rs. 114,000 crore). The $5-billion increase is for pension, insurance, sovereign wealth funds (SWFs), endowment funds and multi-lateral funding agencies.

What’s the objective of this move?

Government bonds are instruments through which the Centre borrows money from public and other sources. The move is aimed at attracting dollars with the government planning to dip into the pool of pension, insurance and SWFs that have large investible funds. It will also broadbase the non-resident investor base for government securities. http://www.hindustantimes.com/Images/Popup/2012/6/27-06-12-biz-02.jpg

Has the central bank announced moves to help infrastructure companies secure more foreign funds?
The RBI has reduced the lock-in period for foreign institutional investment (FII) in infrastructure bonds to one-year from three years.

How will it help?
Global investors have shied away from locking-up funds for three years in infrastructure projects where policy inactivity and delay in approvals were seen as holding back projects.

Has any measures been announced for foreign individual investors?
Yes. The RBI has allowed qualified foreign investors (QFIs) to invest in mutual fund (MF) schemes that hold at least 25% of their assets in infrastructure companies.

What’s the underlying principle behind this move?
QFI is shorthand for a foreign individual who trades in local equities and debt instruments through legitimate channels. The move is aimed at drawing dollars by channelising overseas household savings into India.

Why were the markets lukewarm to the moves?
Pranab Mukherjee’s statement on Saturday had raised expectations about some big-bang reform measures that never came. The measures did not address concerns of the real economy such as dipping investment, rising prices and slowing economy that has hurt job prospects. The markets had been expecting a flurry of reforms initiative. The government has been facing a volley of charges for policy logjam on key areas such as allowing foreign direct investment in multi-brand retail, pensions and easing norms in the insurance sector.