That India Inc should be encouraged to raise rupee funds within India to make big-ticket acquisitions overseas and the like, typically done through external commercial borrowings (ECBs) at the moment, is an interesting thought. Whats more, this finance ministry proposal offers a hint of a larger plan at work thats consistent with the bigger goals of financial sector reform. According to reports, foreign institutional investors (FIIs) may be allowed to set up shop in India without the process of registration that tends to deter the entry of so many. Further, they may be given freer access to the debt market, which, once the modalities are spelt out, could mean that they are able to fatten their bond investment portfolios considerably, and perhaps even issue their own bonds. At the moment, registered FIIs in India may invest only up to $2 billion in government securities and $1.5 billion in corporate debt all of them put together. The latter sum is too meager for FII money to provide any Indian company with serious leverage for a buyout abroad. In any case, coupon rates in India have always been higher than the interest rates on dollar debt instruments. Its no wonder that in 2006, Indian corporates raised around $11.3 billion by way of FCCBs, direct bond and equity offerings overseas.
However, if FIIs are allowed a larger field of debt play here, they may bring in large enough sums to lower the domestic rates in effect, converting a fraction of their current dollar operations into rupees. This would be the interest rate convergence effect, and may impart much-needed depth to the Indian debt market. Analysts also expect Indian companies that have considerable foreign exchange earnings parked overseas to start lending in the Indian market. Such a move would also give FIIs a stronger interest in seeing a strong or at least stable rupee. Indian corporate borrowers would gain not just from lower rates, but also from the elimination of exchange rate risk. So long as its for foreign use, this would be inflation-neutral. In fact, if need be, FII issuance of bonds could even help the RBIs own inflow-sterilisation operations needed to check inflation. So, is there no worry Not so long as these FIIs operate within the frame of their role as investors.