Reserve Bank Of India Eases External Commercial Borrowings Limit To Boost Foreign Fund Flow

on September 12 2012 3:55 AM
Indian Rupee 100 notes
An employee arranges Indian currency notes at a cash counter inside a bank in Agartala, capital of India's northeastern state of Tripura, June 3, 2010. Reuters

In an attempt to boost foreign fund flow into the country, the Reserve Bank of India (RBI) on Tuesday eased the limit of external commercial borrowings (ECB) by any individual, company or group.

The RBI has increased the maximum permissible limit of ECB that can be availed to 75 percent of the average foreign exchange earnings realized during the immediate past three financial years or 50 percent of the highest foreign exchange earnings realized in any of the immediate past three financial years, whichever is higher, subject to a maximum limit of $3 billion, the Apex Bank said in a statement.

According to the earlier guidelines, ECB was limited to 50 percent of the average annual export earnings realized during the past three financial years.

The central bank's decision would help the ailing economy to get a boost from foreign funds as the companies can borrow at a cheaper rate from overseas. Indian companies can get funds at lower interest rates offshore as the interest rates offered by the foreign countries are much cheaper than the rates charged by the Indian banks. This will help the companies repay their loans in rupees in India.

Currently, the companies get loans at the rate of 11-13 percent from Indian banks, while they can get the loans at a interest rate of 4 percent through ECB.

RBI is definitely working towards increasing foreign currency supply in India, Moses Harding, head of asset liability committee and economic research at IndusInd Bank told moneycontrol.com.

This measure is likely to serve the twin benefits. While it will bring some stability in rupee's movement against the U.S. dollar, the high rate of inflation too can be controlled on account of lower input costs. Importers are benefitted as rupee becomes strong from steady. No doubt, it will prompt a positive sentiment in the market, he said.

However, analysts also point out that the companies would not be able exploit the full benefit of the differences in interest rates as fluctuations in the rupee offset the part of the benefits that companies could get from the cheaper offshore loans. 

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