The Hindu Business Line : Borrowing abroad made easier

The latest decision by the Reserve Bank of India to let companies borrow up to $50 million each abroad for spending in rupees is significant not so much for the prospect of any large additional foreign exchange inflows that may be triggered as for the reversal of its policy stance in force since last August. The RBI has until now prohibited large mobilisations under this head finding their way into the domestic market and exacerbating the problem of plenty of the kind it faced with foreign exchange flows. Indeed, it made even the use of proceeds of small-ticket loans (less than $20 million) for meeting rupee expenditure more difficult by requiring borrowers to obtain a specific approval. That these conditions were put in place at a time when India was grappling with the problem of unabated dollar flows which hurt textile and software exporters hardly needs reiteration. Equally, the RBI is now confronted with a problem of sluggish inflows and a weakening rupee, aggravated by an unprecedented rise in crude prices with all its implications on inflation.

It is a moot point if the latest initiative will relieve the pressure on the rupee’s external value. For one, small-ticket loans have never really been a serious factor in India’s balance of payments. Second, the sub-prime crisis in the US has made liquidity so tight that even the most creditworthy borrower now finds accessing capital from the global markets a tough proposition. With many international financial institutions trimming their balance-sheet sizes and mobilising funds to shore up their capital base, lending to third-world country borrowers is perhaps the last thing on their minds. If the RBI has in mind a target exchange rate for the rupee, it would perhaps be achieved better by an aggressive intervention in the forex market than by policy measures of the recent kind.

In terms of actual inflows, the latest initiative may not amount to much. It is nevertheless welcome for enhancing the freedom that domestic enterprises enjoy for sourcing capital for business needs. The policy of partial convertibility on capital account that India has followed all these years has meant that enterprises enjoyed near total freedom in the matter of raising capital abroad or in deploying the same. This is as it should be if they are expected to compete with global players, both at home and abroad. But the last year or so has seen some regression in the policy framework. While the wheel now may not quite have turned a full circle, at least there is evidence that it is moving in the right direction.

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