RBI keeps lid on India Inc's foreign loans | business | Hindustan Times
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RBI keeps lid on India Inc's foreign loans

The latest external debt data show that commercial borrowings from global sources have risen by 11 per cent to $35.98 billion in Dec 2006, reports G Choudhury.

business Updated: Apr 23, 2007 19:40 IST

The Reserve Bank of India (RBI) on Monday decided to keep in abeyance measures announced in October for greater liberalisation of external commercial borrowings (ECBs) amid indications that the central bank may resort to further monetary tightening in its annual review of the credit policy on Tuesday.

In its review of the credit policy in October 2006, the RBI had said it would allow banks to borrow through the ECB route up to 50 per cent of their Tier-I capital, subject to a cap of $10 million, but this would include borrowing for export credit. Earlier, banks were allowed to borrow 25 per cent of their Tier-I capital, excluding any loans taken for on-lending to exporters.

A day ahead of the presentation of the monetary policy, the RBI said, "In view of the prevailing market conditions and likely impact on liquidity, it has been decided to keep the operationalisation of the policy announcement in abeyance."

Loans raised by the private sector from international capital markets with maturities 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 set by the Finance Ministry. The limits are set keeping in view the sectoral requirements and the fallout on balance of payments.

The latest external debt data released by the government show that commercial borrowings from global sources have risen by 11 per cent to $35.98 billion in December 2006 from $32.46 billion in September 2006.

Commercial borrowing accounted for 25.2 per cent of India's $ 142.7 billion external debt in December 2006. In the previous quarter, commercial borrowings represented 23.8 per cent of the total external debt of $136.5 billion.

Analysts' points out that a continuous rise in inflation may have forced the RBI to defer the easing of ECB norms as it carried the possibility of increasing liquidity in the system, which might fuel inflation.

Inflationary pressures in the last few weeks have led to a rise in the value of the rupee. The rupee touched a nine-year high against the dollar on Monday. The RBI is likely to continue tough measures to check liquidity growth and prevent a further rupee rise.

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," the RBI has pointed out.