What's proposed? The Reserve Bank of India, or RBI, recently modified its external commercial borrowing, or ECB, policy, making it easier for Indian companies to access foreign funds. It has raised the 'all-in-cost' ceiling, which includes the maximum permissible interest rates and fees companies can pay while borrowing overseas. The new norms also make it mandatory for companies to park ECB loans for domestic expenditure in rupee accounts. Earlier these could be kept overseas in foreign currencies.
What will change? The revised norms allow Indian companies to raise debt for three to five years by paying up to 350 basis points, or BPS, above the London Inter-bank Offered Rate, or LIBOR. Earlier the ceiling was 300 BPS. Companies have not only been directed to bring back ECB loans meant for rupee expenditure, but the activities on which they can be spent have also been specified. They cannot be used in other areas, especially for investing in the capital market, real estate, or for inter-corporate lending. Of course, ECB loans taken for foreign currency expenditure can still be retained abroad.
Implications: The change in ECB norms is likely to have a two-fold impact. First, the raising of the all-in-cost ceiling will help Indian companies attract funds, "Companies are currently facing difficulties in raising funds," says Nimish C. Shah, Managing Director, Fortune Financial Services (India), a Mumbaibased investment bank. "Since the cost of credit is lower overseas compared to Indian markets, any company offering higher interest rates will attract large investors."
Second, parking funds raised through ECBs in rupee accounts could increase the demand for the rupee, arresting further depreciation.