With improvement in the global credit markets and narrowing of spreads, the Reserve Bank of India decided today to reintroduce the ceiling on interest rates that Indian companies pay for external commercial borrowing.
The norms that take effect from January 2010, would permit Indian companies to raise debt for three to five years by paying up to 300 basis points above the London Inter-bank Offered Rate (Libor). Those using the ECB window to raise funds for over five years would be allowed to pay up to 500 basis points over Libor, RBI said in a communication this evening.
RBI had lifted the restriction on ECBs in January, following intensification of the global financial crisis after Lehman Brothers collapsed.
RBI also decided today to shut the special window that allowed companies to buy back foreign currency convertible bonds to reduce debt burden at the height of the global financial crisis.
The reintroduction of the cost ceiling and withdrawal of the FCCB buyback facility are the latest in a series of rollbacks RBI has introduced since the economic environment improved. In late October, the central bank had decided to revert to a statutory liquidity ratio of 25 per cent for Indian banks.
While the overall direction was to signal a check on excessive inflows, RBI has eased ECB norms for telecom companies and infrastructure-focused, non-banking finance companies.
In addition, companies engaged in the development of integrated townships have been given another 12 months (up to December 2010) to make use of the simplified norms announced last year.
The simpler norms for telecom companies were an extension of the October 2008 decision, when operators were allowed to use ECBs to obtain 3G licenses. Now, they have been permitted to use the route for payment of spectrum allocation, too.
A senior executive at a leading foreign bank said RBI was signalling, through today's moves, to check excessive flow of capital into the country.
"The high capital flows through ECBs, FCCB and portfolio investment have pushed up the value of the rupee against the US dollar. Another message is that only high-quality companies should tap the overseas market," the executive said.
