By IANS,
New Delhi : Leading industry lobbies Thursday differed over the central bank’s decision to tighten foreign borrowing norms on the ground that the liquidity crunch has eased considerably and it was easier to raise capital.
The Reserve Bank of India (RBI) Wednesday brought back the price ceiling on overseas borrowings or the maximum rate at which Indian corporates can raise foreign funds, while stopping the practice of buyback of foreign currency convertible bonds (FCCBs) with effect from January.
The cap on cost of external commercial borrowings (ECB) was removed almost a year back when companies found it difficult to raise capital amidst a global credit crunch.
“RBI measures on reversing relaxation of ECB guidelines and discontinuation of buyback of FCCBs is in response to easing liquidity conditions,” said Confederation of Indian Industry director general Chandrajit Banerjee.
“It is an indication that RBI is slowly unwinding the liquidity enhancing measures it had put in place to combat the financial crisis. However, these measures should not be seen as a precursor to monetary tightening through a rate hike,” added Banerjee.
In a notification Wednesday, the central bank had stated that in view of the improvement in the credit market conditions and narrowing credit spreads in the international markets, “it has been decided to withdraw the existing relaxation in the all-in-cost ceilings under the approval route with effect from January 1, 2010.”
Thus, a company wanting to raise money overseas on a tenure of five years will not be allowed to pay interest more than 300 basis points above the London Interbank Offered Rate (Libor), while for over five-year sums, the ceiling has been set at 500 basis point above Libor.
Libor, which varies according to a country’s currency, is calculated as an average of rates at which international banks lend to each other.
The RBI has disallowed companies from buying FCCBs, saying: “Keeping in view the prevailing macroeconomic conditions and global developments, especially the improvements in the stock prices, it has been decided to discontinue the facility with effect from January 1, 2010.”
CII also said the decision to exempt certain key categories, such as telecom companies raising debt for 3G licenses and non-banking financial institutions involved in the infrastructure space, from the tighter guidelines was a welcome move.
However, the Associated Chambers of Commerce and Industry of India (Assocham) in a statement said it was early to take such steps as the economic recovery was still fragile.
“RBI’s move to tighten norms for foreign borrowing is not likely to be a positive step forward in view of the still uncertain and cautious growth of the economy post-economic slowdown,” said Assocham in a statement.
“The step is not in line with the government’s concern to continue stimulus for the time being till the growth as seen by GDP (gross domestic product) numbers is reassuring and durable for the next at least two quarters.”