HT Image
HT Image

Policy grapples with dollar surge

The government is examining various options to define the broad contours of an appropriate policy matrix to moderate foreign fund inflows, reports Gaurav Choudhury.
Hindustan Times | By Gaurav Choudhury, New Delhi
UPDATED ON OCT 18, 2007 12:03 AM IST

The government is examining various options to define the broad contours of an appropriate policy matrix to moderate foreign fund inflows in the wake of an unprecedented surge in both debt and portfolio inflows without being seen as intrusive.

External commercial borrowings (ECBs) continue to remain the single largest contributor to India’s external debt accounting for a huge 63 per cent during the April to June period this year.

India Inc is finding it easier and cheaper to raise funds from overseas financial markets to fund their domestic expansion plans, particularly in the context of a rising interest-rate regime in the home country.

The Reserve Bank of India's (RBI) latest data on external debt showed that ECBs during April to June 2007-08 stood at $48.3 billion, up by 12.9 per cent from the same period last year.

The opinion within the official circles was that a “very large” proportion of ECBs raised by Indian corporates could still be circumventing the end-use norms.

In August, the government had tightened ECB norms to check foreign currency inflows by imposing a ceiling on its end-use under which foreign debt above $20 million would necessarily have to be used for foreign currency expenditure and parked overseas.

The RBI 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.

The Prime Minister’s Economic Advisory Council headed by former RBI governor C.Rangarajan said “there are some types of flows on which restrictions can be imposed without being seen as intrusive”.

Concerned about the copious inflows into Indian bourses, market regulator Securities Exchange Board of India (SEBI) proposed a cap on investment through participatory notes (PNs). During the last one month, foreign institutional investors (FIIs) have pumped over $8 billion into Indian equities, majority of which is believed to be through PNs.

Foreign Direct Investment (FDI), the more robust and long-term source of overseas fund inflows, has also grown significantly, making India the second most attractive FDI destination after China.

FDI into India touched $4.9 billion in the first quarter of the current financial year, largely led by British telecom major Vodafone’s $801 million injection into the country’s growing telecom market. Inflows during the first quarter of the current year grew by 185 per cent, against $1.7 billion in the corresponding period last year. During January-June 2007, inflows rose 216 per cent, compared with $3.6 billion in the corresponding period a year ago.

Story Saved