New RBI regulations on External Borrowing

Alarmed with the India’s slowing growth story, with the GDP rate falling to 6.5 per cent in the year 2011-12. Industrial growth has been steadily slow for several months, with a mere 0.1 per cent growth in the first few month of financial year 2012-13 and with the growth of exports at a negative 0.69 per cent in dollar terms during April-May 2012, RBI in the end of the month of June 2012 has come up with new norms to restore the confidence of investors, both domestic and overseas, so that the deceleration of growth could be arrested by promoting capital inflows through debt route.

These new norms has their focus on policy related to foreign institutional investment in government securities and on rationalizing long-term infrastructure bonds with a new scheme for external commercial borrowings (ECBs).

The following are the salient features of these regulations:

1.    The new RBI regulations allow companies in the manufacturing and infrastructure sectors with foreign exchange earnings to borrow in dollars to cover rupee loans up to a ceiling of $10 billion, against the current limit of $5 billion. This means companies in the infrastructure and manufacturing sectors can raise funds via ECBs to repay rupee debt within the ceiling of $10 billion.

2.    The RBI has eased the cap on foreign investment in government bonds from $15 billion to $20 billion. 

3.    The RBI has also further expanded the set of foreign investors eligible to invest in Indian government securities (G-Sec) to cover sovereign wealth funds (SWFs) and pension funds with some fillips to qualified foreign institutional investors (QFIIs) in infrastructure mutual funds.

Criticism:

According to critics relaxing the norms for capital inflows through debt route would result in the inflows for short term only. Also the nature of inflows of this kind would be highly speculative and volatile.

The better solution would be to promote Foreign Direct Investment (FDI) in the manufacturing sector, which can only be attracted by reforming the manufacturing sector, enhancing its productivity and making it more competitive