Looking overseas for borrowings

Time was when Indian firms had no choice but to live with high interest rates charged by domestic banks. For decades, interest costs singularly contributed to the high cost and uncompetitive industrial economy. That is no longer the case. Firstly, interest rates have themselves become more flexible, with the Reserve Bank of India adjusting its key rates in tune with growth and price stability concerns. Secondly, Indian firms have found alternatives to domestic credit through global markets. High growth and a steady build-up of goodwill by Indian companies has led to a situation where capital is available at far cheaper rates outside the country. All these factors came together in the period of sustained high growth between 2005 and 2008 when external commercial borrowings hit the high mark as never before. Then, the September 2008 meltdown reduced the flows to a trickle only to pick up in the current year.

As per RBI data, ECBs in the first three quarters, at $18 billion, were more than that borrowed in the previous two years put together. At such levels, do not be surprised if the last quarter adds enough to bring the total within touching distance of the $26 billion mark registered in 2007-08. Of course, at the time, Indian companies were on a buying spree with leading firms such as the Tatas and the Mallya-led UB group acquiring iconic brands. That is not the situation today, with acquisitions more subdued, but the fact that Indian companies are expanding their war chests may be a pointer to some hectic acquisitions in the not-too-distant future. And why not? India's growth impulse is far greater than that in the western economies and requires more resources, often in short supply domestically. That is why the publicly-owned core sector firms have also joined in the hunt for cheap assets such as minerals and other natural resources as far away as Australia and Siberia. If the search for critical resources such as coal increases, the new fiscal may witness a spurt of outbound investments. The data from the RBI, at this stage, however, show a preponderance of firms accessing the ECB route for capital goods imports and modernisation, a feature that tells its own story about the state of Indian capital goods. As other data have shown, the sector has witnessed paltry expansion with Indian firms more inclined towards imports.

The RBI's tight money policy that has driven, and will continue to drive, domestic interest rates upward provides the best incentive for companies to opt for ECBs. That should worry the RBI and Indian banks, in general.

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