The government is likely to restrict companies from converting external commercial borrowings (ECBs) into rupee assets. Further, it may allow companies to bring home ECB proceeds only in phases. The move, which in all probability will be a temporary measure, will check rupee appreciation and slow the rapid inflow of foreign funds into India.
Several companies are using the ECB route to benefit from interest arbitrage?the interest rate on ECBs is almost 2.5 points cheaper than on domestic debt?rather than for productive purposes. Mohandas Pai, HR head at Infosys Technologies, estimates that roughly three-fourths of ECBs are used to gain from the interest rate differential between India and the US or other developed markets.
Further, some companies do not immediately use ECB proceeds but deploy them in treasury operations, instead. The conversion of ECBs into rupees increases money supply and thereby fuels inflation, pushing up interest and exchange rates.
The government feels breaking this cycle, totally or partially, could temporarily halt the rapid appreciation of the rupee.
?Companies might be mandated to park ECB funds, either wholly or partly, outside India until they are to be deployed, thereby indirectly stopping their conversion into rupee assets,? a finance ministry official said.
The Prime Minister?s Economic Advisory Council (EAC) has also highlighted the misuse of ECBs in its recent economic outlook report. ?Regulatory agencies could decide on feasible limits that can be imposed on the conversion. It will restrict the substitution of domestic loans with ECBs loans,? said EAC member Saumitra Chaudhuri.