Finance Ministry of India imposed some capital controls to control the surging dollar inflows and prevent further rupee appreciation. This time also they have imposed controls on External Commercial Borrowings (ECB).
Capital Controls could be of various types and so far policy makers have been targeting External Commercial Borrowings. These are loans Indian companies raise in Dollars/Pounds etc for financing their expenditure. Earlier, a control was imposed via which companies could not raise loans by offering interest rates higher than stipulated.
This time they have categorised ECBs:
- Any company raising External Commercial Borrowings of more than USD 20 million would be permitted to use the same only for financing permissible foreign expenditure i.e. imports, acquisitions abroad. This implies that dollars raised via ECBs will have to be spent overseas and cannot be used to finance rupee expenditure.
- Companies raising ECB less than USD 20 million for financing expenditure in India, would require permission from RBI for doing the same.
So some development on rupee appreciation. Let us see the impact.
Update: Ajay Shah feels the capital controls would not be effective.