Nearly seven months after international rating agency Standard and Poors? upgraded India?s ratings from speculative to investment grade, the foreign money just doesn?t stop pouring in. And the full-speed dollar deluge has heightened the nervousness of policy mandarins who are trying hard to tackle the rising capital inflows and its implications.
The spiraling Sensex and the rising rupee, has also made the government suspicious of the quality of funds flowing into India.
Fighting a desperate battle to moderate inflows, the authorities have restricted various channels of capital inflow, while encouraging people and companies to invest overseas in order to increase outflows.
The finance ministry and the Reserve Bank of India (RBI) have modified the external commercial borrowing (ECB) policy thrice since April 2007, severely restricting the flow of funds via this route into India.
Foreign investors pumped in $4.6 billion into the stock market in October alone, taking the total net buy to $17.6 billion this year. On the back of these massive capital inflows this year, much higher than a record $10.7 billion in the whole of 2005. The government has pushed the market stabilisation scheme bonds to Rs 200,000 crore in two revisions to help RBI mop up dollars.
Despite this the rupee has strengthened and hit a peak of Rs 39.27 to a dollar last week ? it?s highest since March 1998 ? hurting exports and making the life of RBI more difficult. The central bank has bought nearly $40 billion in the first eight months of this year to absorb the huge inflows and to rein in rupee.
In April 2007, the government said that foreign investment raised through issuance of non-convertible, optionally convertible and partially convertible preference shares would be treated as ECBs rather than FDI.
This further limited inflows since companies issuing such shares had to adhere to much stringent ECB norms and caps as compared to the relatively easier FDI norms.
Only a month later in May, the government made it difficult for small companies to raise ECBs by lowering the interest spreads over Libor on such borrowing. It also barred completely barred real estate companies from raising ECBs in order to thwart a possible real estate bubble.
Again in August this year, the government restricted the upper limit for conversion of ECBs into rupee assets to $20 million for a single company from $500 million earlier, thereby indirectly putting end-use restriction on the use of funds. This move has substantially discouraged Indian companies from raising ECBs, which are much cheaper than domestic loans despite interest rates being lower in the international market.
Apart from using measures to restrict inflows, the RBI liberalized overseas investment rules for individuals and companies in September 2007. While it doubled the overseas investment limit for single investors to $200,000 in a fiscal year, it raised the amount Indian companies could invest in their overseas joint ventures to 400% of their net worth from 200%. The central bank also hiked the mutual funds? overseas investment cap to $5 billion from $4 billion.