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Tuesday, Jul 17, 2007
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Business Daily from THE HINDU group of publications Tuesday, Jul 17, 2007 ePaper |
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Corporate Corporate - Overseas Borrowings Economic Advisory Council advocates restraint on ECBs
Rangarajanspeak: Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, addressing a press conference on ‘Economic Outlook 2007-08’ in the Capital on Monday. —
Our Bureau New Delhi, July 16 Indian companies may well be curbed from deploying external commercial borrowing (ECB) proceeds for purposes other than overseas acquisitions or import of capital equipment, if the Prime Minister’s Economic Advisory Council (EAC) has its way. The EAC, in its Economic Outlook for 2007-08 report released here on Monday, has warned against the ECB window being used by companies to ‘bypass’ the domestic interest rate structure. With favourable global interest rates and the added advantage of an appreciating rupee, there is incentive now to borrow from abroad and use these funds to meet working capital needs, treasury operations or even acquire domestic assets. “Companies that can raise money overseas at rates lower than what prevail in the domestic market effectively bypass the structure of domestic interest rates and the framework of monetary policy. Perhaps the best non-discretionary way of ensuring that such loans/bonds are used not to acquire rupee assets (where the bypass becomes effective) is to limit the conversion of ECB proceeds into rupees”, the Outlook has suggested. That would imply stipulation of end-use restraints on ECBs, the net inflows of which amounted to $16.08 billion in 2006-07 (against $ 2.72 in 2005-06) and projected at $20 billion this fiscal. “We are treading on slippery path and it calls for some scrutiny, even if on a temporary basis”, said the EAC Chairman, Dr C. Rangarajan, while briefing presspersons. He, however, emphasised that the council was against any restrictions on equity inflows, whether portfolio or direct investment. “Equity investment by its very nature is high-risk and policy continuity is an essential element to initiate and maintain such flows; they cannot be turned on and off at will,” the report said, adding there should be no signal sent out “that we are going back on liberalising the capital account”. According to the report, any curbs on capital inflows to prevent rupee appreciation should be limited to the debt side. While non-resident Indian deposits no longer attract any premium over the London Inter-Bank Offered Rate (Libor), the EAC feels there is scope for further scaling down of rates to the sub-Libor levels offered by “established foreign banks”. The EAC Outlook has estimated that it is possible for the Reserve Bank of India (RBI) to buy up dollar inflows of up to $25 billion a year and add to its forex reserves, without this resulting in money supply growth in excess of the ‘desired’ 17.5 per cent. It is only inflows beyond $ 25 billion that are cause for concern, requiring sterilisation through issue of market stabilisation scheme bonds or raising of cash reserve ratios. During 2006-07, net capital inflows totalled $44.94 billion, which the report expects to touch $ 57 billion this fiscal. Even with a higher current account deficit of $17.4 billion (against $9.61 billion of 2006-07), there will be a reserve accretion of over $40 billion (up from $36.6 billion and $15.1 billion in the preceding two fiscals). The council has further projected the economy to grow by nine per cent in 2007-08, which is marginally lower than the 9.4 per cent for 2006-07.
Related Stories: More Stories on : Corporate | Overseas Borrowings | Forex
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