With India’s external sector looking a lot more comfortable than it did a year back, and a stable government in place at the Centre, there has been, in recent months, an increase in the appetite for Indian paper. Both companies and banks have been able to tap the overseas markets for long-tenure bonds at meaningfully lower spreads. With the current account deficit (CAD) for FY14 at a five-year low, at $32.4 billion or 1.7% of GDP, and forex loan repayments in the near term not heavy—less than $20 billion is to be repaid by March next year—the government is now understood to be taking a re-look at the norms for External Commercial Borrowings (ECB). Between FY12 and FY14, a total of just over $100 billion has been raised via this route. Media reports suggest the rules are being studied with a view to making the terms more lenient for borrowers. While doing away with the sectoral caps may not hurt, end-use restrictions need to remain in place, however tough that might appear.
The government doesn’t really need to raise the interest rate caps since a more favourable environment will automatically lower the rate at which companies borrow; firms that can’t borrow within the current cap shouldn’t be encouraged to do so in any case. Also, it must be compulsory to hedge these loans to the extent the company doesn’t have matching forex revenues. The Reserve Bank of India (RBI) has already asked banks to be more vigilant on unhedged forex exposures of their clients, but given how vulnerable corporates had become last year when the rupee saw a sharp depreciation to levels of 68 against the dollar, leaving exposures uncovered cannot be prudent. It is true that rupee loans are costly and the idea is not to discourage companies from tapping markets abroad, at a time when lenders view Indian paper favourably—especially since the funds can be used to repay rupee borrowings—but to be cautious. The conflict in Iraq and the consequent rise in the price of crude oil are just two of the most immediate potential risks, there could be many more. While foreign flows may continue to be strong this year, the country’s overall foreign debt remains at elevated levels—$426 billion at the end of March, 2014. The forex reserves, however, are just at levels of $315 billion or around eight months of import-cover. Prudence must not be sacrificed