The Hindu Business Line : RBI asks corporates to source funds locally

Bankers said that the central bank’s reluctance stemmed from fears that the current broad money supply expansion would surge beyond the current level of 21 per cent.

C. Shivkumar

Bangalore, March 24 Faced with the mounting inflationary pressures, the Reserve Bank of India is unrelenting on relaxing the clamp down on external commercial borrowing (ECB) imposed last year.

Sources said that the some corporates had approached the RBI for relaxing the ECB guidelines, for raising low cost resources, particularly for infrastructure projects. Moreover, sources said, that almost all the domestic banks were opposed to the move for permitting corporates from the raising cross border resources in view of slack credit offtake.

Instead, the sources said, the RBI was now asking project promoters to source the foreign exchange directly from the financial markets in the country. This implied that the corporate purchase their foreign exchange requirements from the open markets. Bankers said that they were prepared to meet the foreign exchange resources for genuine requirements. This would allow end-use monitoring, the bankers said.

Pending applications

Among the applications pending for the ECBs before the RBI include those of the power sector majors. Rural Electrification Corporation’s application for raising close to a $1 billion was still pending before the RBI. In fact, all the public sector power majors have already sought relaxations in the view of their large resource requirements.

Infrastructure corporates have argued that the cost of funds from the domestic lenders were high. Currently, PFC’s project finance for AAA rated corporates is about 10.25 per cent or about 200 basis points below the current benchmark prime lending rate. Where financing is on a project recourse basis, the costs are closer to about 12 per cent. ECB costs, with six month London Inter bank offered rate currently at 2.53 per cent, are about 6 per cent.

Consequently, in a regime of tariff-based bids, pushing down power tariffs was not easy. GMR group’s Chief Financial Officer, Mr Subba Rao said, “If the costs are high, the tariff bids will also be high.” To keep power tariffs low, power sector corporates get into long term hedges. These costs are factored in making the tariff bids.

RBI’s concern

But the RBI’s concern related to the impact on domestic money supply in the event of lowering of ECB flood gates. Liquidity is still a major worry with the central bank, especially since inflation is on the verge of 6 per cent, well above the central bank’s declared threshold of 5 per cent. Bankers said that the central bank’s reluctance stemmed from fears that the current broad money supply expansion would surge beyond the current level of 21 per cent. Money supply growth rate is already well over the RBI’s targeted band of 15-17 per cent. ECB inflows, in the past, exerted an upward pressure on the exchange rate, prompting foreign exchange interventions and sterilisation through open market operations, leading to reserve money expansion.

Besides, there were other fiscal issues involved as well. The fiscal impact of the open market operation was in the form of mounting interest service cost on market stabilisation scheme (MSS) floats. This year the estimated interest liability on MSS floats was Rs 8,351 crore. Allowing corporates to raise the funds directly from the domestic financial markets, the banker said, allowed for better management of the overflowing foreign exchange coffers and reduce the interest liability on MSS floats, they added.

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