The Hindu Business Line : ‘ECB curbs would push up costs for medium-sized companies’

Chennai, Aug. 10 Medium-sized companies would face higher costs because of the latest curbs on External Commercial Borrowings, according to Mr Devendra Nevgi, CEO & CIO of Quantum Asset Management company.

Explaining this in detail, he said: “The cost of incremental rupee borrowing, which would replace the ECBs, will entail an additional cost of around 200-250 basis points per annum for a 5-year term, depending on the credit rating of the companies. The cost also is a function of whether the company is willing to take the currency risk or not. The inability to roll over the expiring ECBs would also add similar burden on the corporates. Larger size companies will find their way out. The fact that the funds have to be retained abroad earning lower interest rates, till end use, would entail some loss too.”

Money Supply

At the same time he clarified that the closing of the ECB tap may not necessarily lead to greater domestic borrowing or higher rates overall. Mr Nevgi said, “The fungiblity of ECBs & domestic credit may not be 100 per cent. On a gross flow basis, the total cap of ECBs ($22 billion), is only around 4.50 per cent of the total bank credit base and around 2.55 per cent of the money supply base. Moreover, the banking system is surplus now. The interest rates may not go up merely because of incremental demand of rupee funds. Rates may be influenced by, inter alia, RBI’s stance on liquidity, sterilisation & non-ECB inflows.”

He also feels that this step would not stop the rupee moving up. He said, “The size of ECB inflows annually as a proportion of gross dollar inflows in India is very low at around 4.5-5 per cent. Moreover if the net ECB inflows (after repayment), the proportion is further lower. As compared to a daily trading volume of around $40 billion in India’s foreign exchange markets, the ECB net inflows are proportionately smaller to have a significant impact on the currency.

“With the perception of Indian economy being very positive, there will be no dearth of flows that are insensitive to currency policies of the country. The rupee will be impacted more if the FIIs flow reverses due to global risk aversion or liquidity crunch abroad.”