Limited gains from ECB relaxation

The recent relaxation for the raising of funds via external commercial borrowing (ECB) might help only a handful of companies. For, the central bank has attached stringent riders to the new norms.

In addition, lower risk appetite globally and an unattractive interest rate differential could be a hurdle for companies to take advantage of the relaxation. Only those with a long-term view on the rupee might stand to gain. On Monday, the Reserve Bank of India (RBI) allowed companies from the manufacturing and infrastructure sectors to repay domestic debt by borrowing funds from international sources via ECB.

The relaxation comes with riders. Only those earning foreign exchange for the past three years are eligible for ECB to repay rupee loans taken for capital expenditure. The central bank has said the forex required to repay the ECB is not to be taken from Indian markets; forex earnings are to be used. “While it will limit the number of companies that may benefit, the idea is to provide access only to companies that are naturally hedged, which appears very prudent,” said Sajjid Chinoy, India economist at JP Morgan.

The central bank took the measure to attract foreign fund flows. However, “raising funds in the global markets will remain a challenge for Indian exporters and infrastructure companies, given the declining risk appetite”, said Karthik Srinivasan, senior vice-president and co-head, financial sector ratings, Icra.

Replacing high-cost domestic debt with cheaper foreign loans might also not be possible.

“All-in-cost for one year’s borrowing will be around 11 per cent and for other tenors, it is almost at par with the rupee borrowing cost,” said Moses Harding, head of market research at IndusInd Bank. He said there’d be no cost advantage if the borrowing company decided to avail of ECB on a fully hedged basis. “ECB will only benefit companies prepared to take a long-term view on the rupee against a reward of three-four per cent,” said Harding.

The measure came after the rupee had tumbled to all-time lows of 57.33 per dollar last week. The currency has lost about 30 per cent since the three-year-high of August 2011. Apart from spot intervention, RBI has been taking several measures to stem volatility in the rupee-dollar market since December 2011. However, none of these seem to have yielded the desired results.

“The rupee has become very sensitive to the risk-on, risk-off thinking in the markets,” said Paul Mackel, head of Asia currency research at Hongkong and Shanghai Banking Corporation in a recent interview to Business Standard.

He added the markets are more concerned about developments in domestic policies than looking at a respite coming from the Euro zone.