'Relax foreign borrowing norms to boost growth'

(This story originally appeared in on Jan 08, 2021)

MUMBAI: A recent book on India’s external commercial borrowing has made a case for relaxing norms on external commercial borrowing to boost growth.

According to the book, ‘India’s external debt – features, trends and policies’ authored by Ashutosh Raravikar, director at Reserve Bank of India’s department of economic policy and research, there is a closely observed positive relationship between ECB disbursements and capital goods imports.

“This leads to the corollary that when ECB rises, imports of capital goods increase, which in turn lead to productive investments thereby contributing to growth impulses,” Raravikar said in the book.

Among the relaxations, he has called for are liberalization in norms such as revising the ceiling on all-in-costs which keeps a lot of issuers away, relaxing the tenor and end-use of funds. Currently, it is easier for companies issuing long-term bonds to get permission.

According to the book, ECB complements domestic lending when domestic rates rise to result in a high differential between local and international rates. Also, there is an inverse relationship with local liquidity. This means that if money markets dry up ECBs can help balance it out.

It adds that in a post-Covid world, ECBs can compensate for portfolio investors should they change their mind about investing in India. Also encouraging ECBs can augment the flow of foreign exchange when it is most required.

According to bankers, two requirements for the development of ECBs is creation of a vibrant domestic bond market and to allowing issuers to hedge against foreign currency risks. “The long-term strategy is to have sustainable external debt, which can be reapid from our own resources,” the book said.

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