ECB norms may be eased for core companies

ECB norms may be eased for core cos

19 Jul, 2008, 1752 hrs IST, ET Bureau

NEW DELHI: The government is likely to make it easier for infrastructure companies to borrow from abroad – a key requirement for sustaining the economy’s rapid expansion. The high-level coordination committee on external commercial borrowings (ECBs) is expected to meet soon and the focus would be on enabling infrastructure companies to access funds cheaper and faster. Allowing infrastructure companies to bring home more funds may also help in containing inflation if its impact on liquidity is strictly checked, finance ministry officials feel. A stronger rupee may help the government in reducing the import bill as higher dollar inflows can enhance rupee’s purchasing power. At 11.91%, wholesale prices-based inflation is hovering close to 12%. “In a situation like this, encouraging inflows would help ease inflation. Infrastructure companies should not be deprived of long-term funds. Easing of ECB norms should happen logically. Sooner or later, the high-level co-ordination committee on ECB would meet,” a government source said. The forthcoming meeting of the panel, which comprises officials from the finance ministry, capital market regulator Sebi and RBI, is set to discuss the issue. The source said that government suggests policy and the RBI considers it and decides the quantum of relaxation. “It is the RBI which decides the number,” sources added. Government sources had recently told ET that using exchange rate as an inflation-management tool involves a cost and a cost-benefit analysis has to be made. “We have to decide whether for the economy as a whole it is better to push the rupee up, and at what cost and who bears the cost. Yes, if the Rupee appreciates we will have more fiscal space. There is a view in our economy that there is no direct or significant pass through from the exchange rate to the prices. Also, that while there might be a pass through from exchange rate to prices while the rupee is weakening, there is not much pass through when the rupee is strengthening. That’s a question we have to consider. Impact of exchange rate on inflation is asymmetric as between appreciation and depreciation. We have to pay a cost to manage exchange rate. Its a free market”, a top source had recently said. The government and the regulators had tightened the norms last August when copious capital inflows were adding muscle to rupee, hurting exports and enhancing local money supply. They imposed a tight cap of $20 mn on that part of a company’s ECB that could be brought back to India. This restriction was relaxed to some extent in May by allowing infrastructure companies to bring home $100 mn and $50 mn for others, subject to RBI approval. The government also allowed corporate houses in the services sector such as hotels, hospitals and software companies to raise low-cost funds abroad for importing capital goods. These entities are allowed to borrow up to $100 mn from abroad, subject to central bank’s permission.