Myopic vision!

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ECB curb is a short-term measure
External sector reforms are on the regressive trajectory, the measure taken by the government in consultation with RBI to impose a curb on External Commercial Borrowings (ECB) clearly goes on to show that the RBI is short on options.

Unquestionably the burgeoning capital inflow has posed a macro-economic problem and has complicated monetary policy and currency management; yet opinion remains divided on the effectiveness of the measure announced to limit the pressure on rupee appreciation and promote export competitiveness. Never the less, the market pulse suggests that it is bound to have mild impact; Sachchidanand Shukla, Economist, Enam Securities, asserts “This is just a short term strategy by RBI to curb burgeoning ECBs which is fuelling the rupee appreciation. Moreover, it won’t help IT firms much as they also have to tackle wage inflation among other things.” FIIs, private equities, ADRs/GDRs remain strong alternative avenues of foreign inflows.

Liquidity management seems to be the top priority of RBI and hence the CRR hike to control domestic liquidity and curb on ECB to tighten foreign capital inflows. It was in the month of May that the government barred the real estate companies from raising ECBs and now it has further put restriction on raising foreign funds through ECBs.

Accordingly, companies will now be able to raise up to $20 million for rupee expenditure with prior RBI approval; over $20 million will be allowed only for foreign currency expenditure for permissible end use. Amidst apprehensions that domestic credit pricing of corporates could well see a surge; companies will now have to look at local banking channel. The central bank wants to curb the speculative inflows and leave genuine foreign currency loans for project imports untouched.

The measure with immediate effect comes at a juncture when there is an increased demand for external funds due to the interest rate arbitrage; companies will now have to face higher interest rate regimes at home and this is will certainly dampen the market sentiments. On the other hand, RBI’s efforts to flush out excess foreign capital by encouraging people & corporates to invest up to $100,000 is a welcome sign. This move will prove to be more effective in liquidity management and thus keep inflationary pressure under RBI’s comfort zone.

B&E research: Gyanendra Kashyap

For Complete IIPM Article, Click on IIPM Article Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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