The recent relaxation in external commercial borrowing (ECB) limits for rupee expenditure by Indian corporates is a step in the right direction, given the current macroeconomic situation. Corporates are now allowed to borrow up to $50 million overseas for their rupee expenditure, and companies in the infrastructure sector are allowed to borrow up to $100 million. The government had, in August 2007, tightened these limits and capped ECBs for rupee expenditure at $20million, along with other measures like imposing strict end-use norms and curbing repatriation of funds to India.

The change in measures was talked about as policy flip-flop in some circles, but I think it represents a proactive government and central bank, cognizant of the needs of India Inc and the economy in general. Even the increase in spreads that can be paid over the London interbank offered rate, or Libor, reflects an understanding of the changed global credit conditions.

The tightening of policy last August was necessitated by an unprecedented inflow through ECBs. We received $21 billion between April 2006 and June 2007, which abetted the massive rupee appreciation. There were many concerns about the actual end use of funds and that the funds were being used to arbitrage on the interest rate differential on investments into India. Given the speculative colour of inflows and the massive monetary problems it threw up, the government was justified in capping dollar inflows and tightening their end use.

But the situation has almost reversed now. The rupee has depreciated by 6.5% in the last two months on the back of a higher trade deficit and capital outflows, and liquidity has tightened. Domestic interest rates are moving up due to the increase in CRR to counter high inflation and on fears of fiscal slippage, and the economy is under threat of slowing down.

India Inc is in investment mode and after having raised resources through equity, a substantial chunk of investments going forward would need to be funded by debt. Corporates, especially SMEs, have started feeling the pinch of high-cost debt, and in the absence of a developed debt market, their options are limited. With rising interest rates, the situation would get worse.

India needs substantial investments in infrastructure. Government projections show that 48% of the $500 billion budgeted in the 11th Plan would be debt funded. We would need increased external support for the same. The government has moved in the right direction by easing the ECB limits, but more needs to be done to enable access to credit for genuine purposes at reasonable rates of interest. In the present situation, with inflation running high, domestic interest rates cannot be eased and there is a genuine need to balance the domestic fund requirements through a mix of internal and external sources.

A further relaxation in ECB limits for rupee expenditure over time would allow greater access at competitive rates to deserving corporates. It would also help ease the pressure on domestic interest rates and liquidity. In a scenario where high interest rates and inflation threatens to slow growth, larger fund inflows through ECBs could help maintain growth momentum.

Having said that, the government should continue to monitor the end use of funds and prohibit the use of ECBs for speculative investment. Along with the increase in ECBs, an increase in the foreign institutional investor limit for investment in debt would also help develop the bond markets and provide alternate options of fund raising for corporate India.

The writer is fund manager-fixed income, Quantum Asset Management Company Pvt Ltd