Mumbai: Reserve Bank of India may have tightened external commercial borrowing norms to indirectly boost domestic credit growth rather than to just curb capital inflows, analysts say.
The RBI said late on Wednesday that some concessions on overseas borrowing for Indian firms introduced during the global credit crisis will be withdrawn from 1 January even as it eased rules for the infrastructure and telecoms firms raising funds from abroad.
“This is a positive measure for banks’ credit growth because some of the corporates will return back to Indian banks and this will help improve the credit demand locally,” said Rupa Rege Nitsure, chief economist at state-owned Bank of Baroda.
“As the domestic credit growth is aneamic, that could be another reason, the Reserve Bank may have taken this step.”
Indian banks’ credit growth has slowed to about 10% between April and mid-November from 27% a year ago as companies opted for non-bank sources of funds amid surplus liquidity, cutting demand for commercial loans.
The central bank has said it expects credit growth in the fiscal year ending March 2010 to touch 18%, a number some economists say is probably a tad optimistic.
“The 18% target is quite ambitious, we may not reach there but about 15-16% looks possible,” said Indranil Pan, economist at Kotak Mahindra Bank Ltd.
Wednesday’s changes in overseas borrowing rules will limit the ability of firms to borrow funds abroad and then repatriate them, as well as to buy back their foreign currency convertible bonds under the automatic route and approval route.
“Whether the rule change has any significant impact or not depends on.. how much money has been raised until now above the all-in-cost ceiling. We do not have any data on that,” said Anubhuti Sahay, economist at Standard Chartered Bank.
Limited impact on flows
Impact on capital flows is expected to be limited as bulk of the inflows into India is through the stock market, analysts pointed out.
“There aren’t many opportunities for investors except in emerging market economies like India, so they are just parking those excess funds here,” added Bank of Baroda’s Nitsure.
So far in 2009, foreign funds have pumped in a net $16 billion worth of funds into the local equity market, but in contrast the debt inflows stand at just $1.4 billion.
The move is unlikely to have any significant impact on the rupee, according to almost all analysts.
“I don’t think this will impact the currency too much as most of the borrowing has been done and may be at rollover stage we may see its impact,” said R.K. Gurumurthy, head of treasury at ING Vysya Bank.
“But honestly, in today’s world, things change so rapidly that in the next six months we could see this rolled back.”