Say no to ad-hocism

Updated: Nov 16 2005, 05:30am hrs
The Reserve Bank of Indias decision to turn down the request of the Rural Electrification Corporation (REC) to make external commercial borrowings (ECB) worth $100 million only underlines the need for putting a halt to arbitrariness in decision-making. Had REC been stopped from raising ECB for solvency reasons or its failure to meet the eligibility norms (as amended by the finance ministry on June 2, 2005), one could have appreciated the decision of the RBI.

However, the RBI, taking advantage of the case-by-case clause for granting approvals, rejected the case of REC. It has gone a step further, by advising the finance ministry that PSUs like REC and Indian Railway Finance Corporation (IRFC) should be discouraged from raising external funds. In doing so, it has stretched the finmins lopsided ECB policy, that on the one hand permits corporates to raise up to $500 million under the automatic route, while on the other empowers the central bank to accord case-by-case approval to proposals of financial institutions.

The decision to encourage or discourage ECBs is linked to various parameters like economic priority, macro-economic performance and foreign exchange reserves. However, there can be no case for singling out companies and implementing guidelines in an arbitrary fashion. If the government does not want to encourage ECB inflows, the way to restrict it is to limit the number of eligible sectors, raise the bar so that only better corporates are able to tap overseas markets, lower the permissible spread, extend the maturity period and, finally, dovetail policy in such a way as to take care of the genuine needs of business and industry, without sacrificing the national priorities, objectives and goals.

It is true that policies must be dynamic. Consequently, the ECB policy must be in tune with changing macro-economic fundamentals. Hence, the fact that our forex reserves, that grew from about $130 bn in January 2005 to $142 bn in March, appear to have hit a plateau will have to be factored in. However, frequent policy changes can do untold damage.