India's external borrowings drop to five-year low

The September borrowings dropped by 17.7% to $2.6 bn

The country's external borrowings fell to a five-year low in the April-September period to $11.8 billion as companies preferred borrowing domestically. External borrowings include external commercial borrowings (ECBs) and foreign currency convertible bond. Data from Reserve Bank of India (RBI) show that borrowings dropped 17.7 per cent, year-on-year, to $2.6 billion in September.

“Looking at the all-inclusive cost and hedging cost, ECBs turn out to be slightly expensive compared with onshore borrowings. A few years ago, the hedging costs were slightly low due to which it turned out to be cheaper to borrow overseas. This was also because at that time, the interest rates onshore were on the higher side,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

Data from the Securities and Exchange Board of India (Sebi) shows the funds raised by Indian corporates through private placement of corporate bonds have been picking up and in the April-September 2015 period, it stood at Rs 2.43 lakh crore.

Last month, the central bank came out with a draft paper that allowed Indian companies to raise funds from a wider class of lenders. RBI said companies would be able to borrow up to $50 million in ECBs with three-year maturities and $50 million for five-year maturities, from the earlier $20 million.

RBI data show that in the past five years, external borrowings stood at a high of $18.3 billion in April-September 2011.

According to the draft paper, companies can take the ECB route to raise 10-year funds, which is capped at five years now. Overseas regulated financial entities, pension funds, insurance funds, sovereign wealth funds and similar other long-term investors are included in the list of recognised lenders for long-term funding into India.

The draft paper also said the central bank would now allow real estate investment trusts and infrastructure investment trusts to raise rupee-denominated funds offshore, a step likely to provide some relief to the cash-strapped real estate sector in India.