ECB limit increase: all sound and fury

ECB limit increase: all sound and fury

The Reserve Bank of India’s 25 basis points (bps) hike in Friday’s monetary policy review will put further pressure on investment demand as it gets transmitted through the system. In its September bulletin, the central bank itself notes: “Going by the assessment on date…in all likelihood, capital expenditures in 2011-12 are likely to be lower than the previous year."

One basis point is one-hundredth of a percentage point.

For beleaguered companies looking to raise funds, there seems to be a silver lining in the form of the government’s liberalization of ECB (external commercial borrowings) policy. The government has raised the amount companies can borrow through the so-called automatic route, increased the overall ceiling to $30 billion, and allowed firms to raise debt in Chinese yuan. Indeed, so buoyant is a section of the market that this move was partly responsible for the rupee’s 0.6% appreciation against the dollar on Friday in expectation of inflows.

But they may be a bit too optimistic. The differential between overseas and local interest rates has risen, making it a ripe time for Indian firms to raise overseas debt. But in this atmosphere of risk-aversion, there is no money to be had for love or reputation. Take a look at the evidence.

Credit default swaps, the cost of insuring against debt defaults for State Bank of India (SBI) had risen 83 bps to 275, Bloomberg says, quoting data provider CME. Leave alone its internal troubles, SBI is seen as the proxy for India. The spread between average Indian dollar-denominated debt over US treasuries is kissing 5 percentage points, the most in two years.

Normally ebullient investment bankers say no issuances are happening in the current global macroeconomic environment. This was the case even before the limits were raised. According to Bloomberg data, Indian companies raised some $14.6 billion of overseas loans so far this year, down 17% from a year ago.

Take another indicator, the three-month London interbank offered rate (Libor) to OIS (overnight indexed swap) spreads. The spread has widened in the last six days to 35 bps, showing that banks are increasing reluctant to lend money. Sure, recently the US Fed and the European Central Bank have made efforts to boost dollar supplies, but investment bankers say that US money market mutual funds are cutting lending to the rest of the world. Now, take the case of yuan-nominated debt. The current thinking is that mostly firms will raise money from the offshore yuan market based in Hong Kong. This is a nascent market and a local Libor like spread is only in the making. Local bankers say that Indian and Chinese banks have traditionally not done much business with each other. Sure, trade credit has a chance to pick up and China’s largest lender Industrial and Commercial Bank of China Ltd has just opened an Indian branch. But expect no miracles in the short term.

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