The Hindu Business Line : ECB curbs may see more borrowings at home

Bankers think the curbs on external commercial borrowings (ECBs) announced two days ago, will certainly keep the appreciation of the rupee in check. There is also some consensus on the resultant increase in domestic loan growth. But opinion differs on whether this will necessarily translate into higher interest rates.

Ms. Naina Lal Kidwai, CEO, HSBC India, said, " The curbs will stem the strong march of the rupee. Our house view was that the rupee would move to 39 - that was before the announcement of the ECB policy. That may get shaded a bit now."

Mr M.S.Sundara Rajan, Chairman and Managing Director, Indian Bank said, "The curbs will definitely help arrest the rise of the rupee. This will see to it that there is no excess liquidity and also ensure that inflation is contained. Of course monitoring the end use will be important."

Ms.Kidwai said she expected companies to borrow more locally now.

She said Indian companies had hitherto borrowed abroad to arbitrage on lower interest rates outside. She said, "There was enough liquidity here. It was not lack of money but the cost of money that drove them out." Now that they have to borrow here, would interest costs not go up?

"Obviously. It has to," she said.

Mr.Sundara Rajan, felt that except companies in the pharmaceutical sector who used the ECB route more, the others would not be much affected. He said, "Domestic credit will go up. There was a craze for ECB in the past. That has come down now."

Asked about interest rates going up, he replied in the negative. He said, "You must remember that there is now an inbuilt cushion in margins of nearly 75 basis points, simply because deposit rates have been reduced by a number of banks while lending rates have not yet come down. So there is no justification for interest rates to go up."

Dr. K. Ramakrishnan, Chairman and Managing Director, Andhra Bank, said, "Banks are flush with funds and corporates are aware of it. I think interest rates will hold steady for now. Most banks have hiked their lending rates by 250 basis points during the last year, which I think is enough for the time being."

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