RBI curbs growth in ECB

1. RBI lowers the interest rate a company can pay for Borrowing Abroad (popularly called External Commercial Borrowing):

Average Maturity Period

All-in-Cost ceilings over
6 Months LIBOR*

Existing

Revised

Three years and up to five years

200 basis points

150 basis points

More than five years

350 basis points

250 basis points

The idea is to restrict the inflow of ECB as lower interest rates would mean only those corporates would be able to raise loans which have stronger fundamentals. As per RBI’s latest Macroeconomic survey on April 2007, the net ECB figure for Apr-Dec 07 period is USD 9.3 billion, more than double that of USD 4.4 billion seen in Apr- Dec 06.

The question that comes to mind is why restrict ECB inflow? Some points:

  1. As ECB is nothing but debt flow, it carries risks as I mentioned in my previous post.
  2. RBI would be worried as it means increasing dollarisation of liabilities of Indian corporates’ Balance sheets. With assets in rupees and liabilities in dollars, it could lead to asset-liability mismatch if some projects go awry. This was also one of the main reason responsible for South-East Asian Crisis in 1997.

These are tough times for any regulator. The free market theorists would trash RBI move on the basis that a company would face the consequences if things don’t work out.

RBI, I would believe is not really worried about corporates as much as it would be worried about network effects of such an event on the economy. It has been seen that increasingly financial markets tumble taking a cue from some event which may not really explain why the fall at all happened. This is the biggest challenge facing the regulators and policymakers.

2 Responses to “RBI curbs growth in ECB”

  1. India’s Balance of Payments update: 2006-07 « Mostly Economics Says:

    […] have grown at a shocking rate of 491% this year and are now at about USD 16 billion.That is why RBI revised the rates corporates can pay for […]

  2. Finance Ministry imposes Capital Controls « Mostly Economics Says:

    […] 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 […]

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