RBI changes overseas borrowing norms to stem rupee fall

The Reserve Bank of India (RBI) today announced an increase in the interest rate ceiling for external commercial borrowings (ECBs) and sought immediate repatriation of issue proceeds, in a bid to stem the rupee's free-fall.

Under the revised policy, the all-in-cost ceiling for ECBs of average maturity of three to five years has been raised from 300 basis points over LOBOR to 350 bps over LIBOR.
For borrowings above five years, the rate has been maintained at the existing level of 500 bps above LIBOR.

The proceeds of the ECB raised abroad for rupee expenditure in India, such as local sourcing of capital goods, on-lending to self-help groups or for micro credit, payment for spectrum allocation, etc, should be brought immediately for credit to rupee accounts with authorised Category I banks in India, RBI said in a notification.

ECB proceeds meant only for foreign currency expenditure can be retained abroad pending utilisation.

However, rupee funds will not be permitted to be used for investment in capital markets, real estate or for inter-corporate lending, RBI said.

Some exporters and project finance companies are suspected to be holding back money raised through ECBs abroad in anticipation of further depreciation in the rupee.

The amendments in ECB policy will come into force immediately and the enhancement in all-in-cost ceiling is applicable up to 31 March 2012 subject to review thereafter.

The Indian rupee slumped to an all time low of 52.73 on Tuesday. The slide, according to economists, is further fueling inflation and affecting capital markets.