Mumbai: The Indian rupee bounced back after falling 1% in early trade on Wednesday, 8 August, but still closed in negative territory after policymakers tightened restrictions on foreign borrowing, a move aimed at stemming dollar inflows.
After market hours on Tuesday, the finance ministry said companies that raise more than $20 million overseas would only be able to use the proceeds abroad. They will have to take central bank approval for raising funds up to $20 million for local use.
The changes, effective immediately, do not apply to borrowers who have already entered into loan agreements.
The partially convertible rupee ended at 40.5250/5350 per dollar, recouping most of its losses after hitting an early trough of 40.83. It closed on Tuesday at 40.41/42 and hit a nine-year peak of 40.20 last month.
“There was massive dollar selling by exporters when the rupee fell — it seemed like they were just waiting for an opportunity to offload dollars,” said a senior dealer with a private bank. Dealers also said that a 2.5% rise on the local stock market, its biggest gain in nearly four months, aided sentiment for the rupee.
The local unit has risen more than 9% so far this year as companies stepped up cheaper overseas borrowings to fund their expansion projects.
External commercial borrowings (ECBs) by Indian companies had surged to a net $16.1 billion in the fiscal year ended March 2007, from $2.7 billion the year before, and Standard Chartered estimates companies have raised $9 billion abroad in the first four months of the current fiscal year.
Despite the likely easing of dollar inflows through this channel, HSBC sees the rupee’s underlying strength persisting.
“In response to the key question of whether the restrictions on ECBs shifts the situation from one of excess rupee demand to excess rupee supply, the answer is that it does not. It does reduce the pressure on the rupee to appreciate, but that pressure is still significant,” the London-based bank said in a note.