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RBI fixes limit for External Commercial Borrowings
Why is it in the news ?
- The Central bank has decided to fix a rule-based dynamic limit for outstanding stock of external commercial borrowings (ECBs) at 6.5% of GDP at current market prices.
- According to the RBI, the rule-based dynamic limit has been decided “in consultation with the Government of India”.
More in the news
- On November 6, 2018, the RBI reduced the minimum average maturity requirement for ECBs in the infrastructure space to three years from earlier five years.
- Additionally, the average maturity requirement for mandatory hedging has been reduced to five years from earlier ten years.
- These rules are applicable to eligible borrowers raising foreign currency denominated ECBs under Track I.
- The new rules will make it slightly cheaper for Indian companies and banks to tap the debt markets overseas.
- In recent months, the cost of borrowings in markets abroad has gone up, partly because of the spike in interest rates in the US and also because the spreads have widened, especially for companies in the emerging markets.
External Commercial Borrowings
- India has always promoted capital inflows as a part of the development policy.
- Lack of domestic capital and deficit in the current account compelled the government historically to go after foreign capital.
- In simple terms, foreign capital is money obtained from foreign countries to make investment domestically.
- External Commercial Borrowings is basically a loan availed by an Indian entity from a nonresident lender.
- Most of these loans are provided by foreign commercial banks and other institutions.
- The significance of ECBs their size in India’s balance of payment account.
- In the post reform period, ECBs have emerged a major form of foreign capital like FDI and FII.
Source
Indian Express.