RBI restricts repayment of loans through ECBs

RBI has been concerned that as the rupee gets stronger especially with prospects of a stable government post elections, it would open up an arbitrage opportunity for Indian companies in the forex market.

To restrict the flow of easy money into the soaring Indian markets, the RBI has tightened the rules for taking out external commercial borrowings. In a notification issued on Tuesday, RBI announced it was partially withdrawing the leeway given to manufacturing and infrastructure companies to repay their rupee loans by raising loans from abroad.

The withdrawal is part of the measures by RBI to return to normal conditions from the supporting steps it had unfurled last year when the Indian currency had dipped close to 70 to a dollar. The steps provided easier liquidity to Indian companies including exporters to shelter them from the effect of the plunging rupee and revive confidence in the economy. Following the RBI interventions between July and September, the currency has clawed back. The rupee is now trading at 60.76 to a dollar matching the 10.8 per cent rise in the bellwether Sensex in the past two months.

Abheek Barua, chief economist of HDFC Bank said, “I would expect RBI to take more such measures going ahead. The relaxations had the potential to build up an unsustainable external debt load for the economy.”

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The RBI notification clarifies that the leeway given then, will not be available for the companies if they plan to raise the external borrowing from the branches or subsidiaries of Indian banks abroad. “If the ECB is availed from overseas branches/subsidiaries of Indian banks, the risk remains within the Indian banking system,” the RBI has explained in the notification.

RBI has been concerned that as the rupee gets stronger especially with prospects of a stable government post elections, it would open up an arbitrage opportunity for Indian companies in the forex market.

It has therefore moved in early. It has also advised overseas entities of the Indian banks not to extend financial guarantees to Indian companies “for the purpose of raising loans/advances of any kind from other entities except in connection with the ordinary course of overseas business”.

It has also warned that it has found some exporters from India misusing concessional finance raised from banks to repay their older loans instead of using those to plough into making fresh exports. “This is a clear violation of our instructions … and banks are advised to desist from such practices.”