It is well known that the mad rush to borrow abroad has abated in recent months. The Reserve Bank of India (RBI) has released the latest quarterly data on corporate debt raised abroad through external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs). The total borrowing from November to January was $5.2 billion, a sharp fall from the $7.4 billion collected from August to September.
Indian companies had gone on a global borrowing spree in the first half of 2007, before the credit crisis struck. Much of it was financial arbitrage. Companies took advantage of the credit bubble to pick up as much money as possible at very low interest rates. There was nothing wrong by itself in this opportunism. Corporate treasurers are expected to raise cash when it is offered to them very cheap.
But there was pressure on the overall economy. The inflows of debt added to the gush of capital that was flowing into India, pushing up the exchange rate and adding to money supply.
It was for this reason that the government finally imposed restrictions on foreign borrowing, limiting their use for meeting domestic expenditure. The new data shows that most of the money raised since will be used to either import capital equipment for projects or to fund global acquisitions. In short, dollars are now being borrowed to meet dollar expenses. There is less pressure on the domestic economy.
There will now perhaps be calls from companies for the government to roll back its restrictions, which were anyway not permanent. The drop in foreign borrowing and the withdrawal of foreign money from the stock market has taken some pressure off the rupee. There has undoubtedly been a sharp drop in foreign borrowings compared with the rest of 2007, but that year was an aberration—the last wild scream before the credit market party ended.
It’s still too early to lift the restrictions on foreign borrowing. The central bank is still adding to its reserves, which means that the dollars coming in are more than can be absorbed in the local economy.
But the restrictions should be revisited later this year if the global markets stabilize.
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