The Reserve Bank of India (RBI) said it would withdraw from Jan. 1 some concessions on overseas borrowing for Indian firms introduced during the global credit crisis, although it also eased rules for the infrastructure and telecoms sectors.
The changes would limit the ability of firms to borrow funds abroad and then repatriate them, while still encouraging long-term investment needed to overhaul ageing infrastructure and underpin economic growth.
"In view of the improvement in the credit market conditions and narrowing credit spreads in the international market it has been decided to withdraw the existing relaxation in the all-incost ceilings under the approval route," RBI said in a statement on Dec. 9 night.
A facility for Indian companies to buy back their foreign currency convertible bonds under the automatic route and approval route would be discontinued from January due to the improvement in the equity market.
The changes could slow some inflows into the economy, which have supported the rupee this year, but as they only related to local firms they were not expected to unsettle markets greatly.
"There may be a knee-jerk reaction in the beginning but don't expect too much of a reaction in the market," said Ashutosh Raina, head of foreign exchange trading at HDFC Bank in Mumbai.
"I expect the rupee to remain stable against the dollar after the initial trades and to trade the way it has traded so far."
The central bank said it would allow non-bank financial companies which are focused on financing infrastructure projects to borrow from oversees markets under the approval route.
It also extended by a year a rule which allowed firms involved in developing integrated townships to borrow oversees.
The central bank allowed telecom firms to access oversees markets to fund their bids for 3G spectrum, effective immediately.India plans to auction 3G spectrum in January.
"It will give a boost to longterm investment in infrastructure and telecommunication sectors which require heavy investment," said N.R.
Bhanumurthy, economist at the National Institute of Public Finance and Policy in New Delhi. He said there was still a need to regulate short-term capital inflows which were beneficial up to a point.
Bhanumurthy, economist at the National Institute of Public Finance and Policy in New Delhi. He said there was still a need to regulate short-term capital inflows which were beneficial up to a point.
On Dec. 7, the central bank governor said capital inflows reflected investor confidence in the economy.
An economic adviser to the prime minister has said India could absorb inflows of up to $100 billion in the current fiscal year, well above projected levels of $57-$60 billion.
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