How Will RBI’s ECB Overhaul Play Out?

The reserve bank of India (RBI) recently announced a major overhaul of rules governing external commercial borrowing (ECB), providing a boost for companies looking to raise money abroad. Not only has the borrowing limit been raised, but the maturity period too has been made more flexible, and pricing made more market-linked. End-use norms have also been liberalised. This gives India Inc wider access to foreign capital at competitive interest rates. The decisions could fuel a surge in fundraising via ECBs, especially at a time interest rates in key geographies like the US and Europe are expected to fall further this year. ECBs are essentially funds that companies raise via foreign sources. It could either be in foreign currency or in rupee-denominated loans or bonds. Such borrowings are typically used for purchasing machinery and other assets from abroad, business expansions or even repayment of existing high-cost debt. Under the revised guidelines, companies would now be eligible to raise ECBs of up to $1 billion or 300% of their net worth, whichever is higher. The earlier limit was $750 million. This could give large corporates an advantage and open a significant avenue for better leveraged firms, says Sarvesh Warty, partner, Indian member firm of EY Global. “The RBI has made ECBs easier for serious balance sheet-driven borrowers and harder for leveraged and speculative or opaque kind of borrowers. It will help the long-term strategy of more capital-disciplined people,” says Warty. Notably, the cost of borrowing will now be in line with prevailing market conditions, according to the central bank. This is a major change given that under earlier regulations, there was a ceiling of 450 bps on all-in costs (the prevailing interest rate plus fees). Furthermore, eligible borrowers may raise ECBs with a minimum average maturity period of three years. Borrowers engaged in manufacturing, meanwhile, may also raise ECBs with an average maturity period of one to three years on condition that the outstanding amount of such ECBs doesn’t exceed $150 million. The end-use norms have been liberalised too. Acquisition financing is one area that could get a big boost from the decisions. “Acquisition financing, if it is strategic, can be done now. It has been made very clear. This a major area that some foreign banks talk about,” says Warty. The amended ECB rules come at a time when interest rates in major global markets have fallen over the last year, as the world navigated geopolitical and trade-related uncertainties. The decline in interest rates has been one reason behind the pick-up in borrowing via ECBs, say analysts. It is expected that interest rates overseas could see a further decline, with the likes of the US Fed and the Bank of England expected to cut rates further in 2026. Back home, the RBI is expected to keep rates on hold now. “In a regime where international interest rates are coming down, you are now giving companies more scope to borrow. So, ideally, it (revised norms) should lead to higher overseas borrowing,” says Madan Sabnavis, chief economist at Bank of Baroda. While there is now a sharper regulatory clarity with the revised guidelines, the amendments ensure enough guardrails to ensure external borrowings are going towards productive use cases and not speculative investments. “Some of these things, like chit funds or anything to do with the capital market, are speculative. So, they don’t want you to use the funds for speculative purposes; in a way, the RBI is ring-fencing the borrowings. But whatever is meant for productive purposes has been permitted,” he says. Close to $61 billion was raised via ECBs in FY25. Analysts expect these revised guidelines to increase fundraising via ECBs over the next year. @TheNachiket

How Will RBI’s ECB Overhaul Play Out?

Higher borrowing limit, more liberalised use cases and borrowing at market conditions open the doors for India Inc to access foreign capital at lower rates, but currency depreciation could weigh on costs.