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The Reserve Bank of India, in consultation with the government, has decided to have a rule-based dynamic limit for outstanding stock of External Commercial Borrowings (ECB) at 6.5 per cent of GDP at current market prices.
Based on the GDP figures as on March 31, 2018, the RBI, in a statement said the soft limit works out to $160 billion for the current financial year.
The outstanding stock of ECBs as on September 30, 2018, stands at $126.29 billion.
Current account deficit
The rule-based dynamic limit for outstanding stock of ECBs comes in the backdrop of India’s current account deficit (CAD) increasing to $19.1 billion (2.9 per cent of GDP) in Q2 (July-September) of 2018-19 from $6.9 billion (1.1 per cent of GDP) in Q2 of 2017-18, and $15.9 billion (2.4 per cent of GDP) in the preceding quarter.
CAD arises when the value of goods and services a country imports exceeds the value of goods and services it exports. This deficit can weaken the domestic currency.
ECBs are borrowings raised by permitted resident entities from recognised non-resident entities. Borrowings raised under the ECB framework can be in the form of bank loans; securitised instruments (floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares / debentures); buyers’ credit; suppliers’ credit; foreign currency convertible bonds; financial lease; and foreign currency exchangeable bonds. Last month, the RBI reviewed the extant ECB provisions, reducing the mandatory hedge coverage from 100 per cent to 70 per cent for ECBs raised under Track I (medium-term foreign currency-denominated ECB with minimum average maturity of 3/5 years) of the ECB framework by eligible borrowers for a maturity period of between three and five years.
Further, the central bank also clarified that ECBs falling within the aforesaid scope but raised prior to the date of its November circular, will be required to mandatorily roll over their existing hedge(s) only to the extent of 70 per cent of outstanding ECB exposure.
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