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The RBI, in its annual report, has highlighted that it has rationalised regulations to facilitate better cross-border flows in FY18. It is apparent that the central bank was worried about the country’s balance of payment as signs of stress in external conditions were beginning to appear in 2017-18.
Measures taken
The report elaborates on the measures taken to encourage foreign fund inflows to the debt market, and to increase inflows through external commercial borrowings (ECBs) of Indian companies. Data, however, show that the changes are not too effective. While there was a short-term impact of the RBI’s moves with regard to debt inflows, ECB outflows continued in FY18, despite the rule changes.
The central bank reviewed the rules governing FPI investments in debt securities in FY18 to provide them more room to invest, increase the options available to them, and to make it easier to manage tenor and duration. Caps on FPI investments at the category level were tweaked slightly. For instance, FPIs were allowed to hold up to 5.5 per cent of total G-Secs outstanding, 2 per cent of SDLs and 9 per cent of corporate bonds.
The more significant change was increasing the cap on total FPI investments in G-Secs and other central government securities from 20 per cent to 30 per cent of outstanding stock. Another important change was removing the restriction on investing in securities with less than three-year residual maturity.
Limits in corporate bonds were also rationalised by discontinuing the various sub-categories and prescribing a single limit for FPI investment in all types of corporate bonds.
These changes appear to have had a short-term impact of attracting more debt fund flows to the country in FY18. While there was net outflow from Indian debt amounting to ₹7,292 crore in FY17, the flows reversed with inflow of ₹1,19,036 crore in FY18. The impact of these tweaks are, however, not sustainable. For, there has been outflow from Indian debt instruments amounting to ₹35,673 crore so far in FY19. This could be due to the RBI adopting a more hawkish stance in its monetary policy, rupee weakness and rising treasury yields in the US. The RBI has also been clearly worried about the outflow of funds raised through ECBs. While $1,570 million flowed into the country through ECBs in 2014-15, there were outflows of $4,529 million and $6,102 million in FY16 and FY17.
The central bank has, therefore, tried to plug this outflow by allowing overseas branches or subsidiaries of Indian banks to refinance ECBs of highly-rated (AAA) corporates as well as Navratna and Maharatna public sector undertakings.
The cost of ECB loans was capped at 450 basis points over the six-month $ Libor for ECBs raised in foreign currencies. The prevailing yield of the Government of India securities of corresponding maturity was the cap for rupee ECBs. Housing finance companies, port trusts and companies engaged in maintenance, repair and overhaul, and freight forwarding, were also allowed to raise ECBs.
Decline in ECB
As a result of the RBI measures, outflow of funds raised through ECBs declined to $183 million in FY18. But the point to note is that short-term trade credit is spiking sharply, almost doubling in FY18 to $13.9 billion. This figure will need a close watch as rising global interest rates and weak rupee will make debt servicing a challenge.
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