Govt ups core sector ECB limit to $100m

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Govt ups core sector ECB limit to $100m

The govt has raised the External Commercial Borrowings (ECBs) limit for core sectors to USD 100 million. ECB limit for other companies has been raised to USD 50 million compared to USD 20 million earlier. Government has also raised the cap on FII investments in Gilts to USD 5 billion versus USD 3.2 billion.

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Excerpts from Closing Bell on CNBC-TV18 Watch the full show » Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

By Latha Venkatesh , Banking Editor, CNBC-TV18

The government has raised the External Commercial Borrowings (ECBs) limit for core sectors to USD 100 million. ECB limit for other companies have been raised to USD 50 million compared to USD 20 million earlier. Government has also raised the cap on FII investments in Gilts to USD 5 billion versus USD 3.2 billion. The cap in FII investments in corporate bonds has been doubled to USD 3 billion.

Government has said that USD 500 million cap per company under-automatic route remains. It has raised the cap on cost of 3-5 year ECBs to 200 bps above LIBOR and the cap on cost of over 5 year ECBs has been raised to 350 bps above LIBOR. It said that the core sector companies can spend up to USD 100 million ECB in rupees.

Commenting on the government's decison on ECBs, HSBC said it could take 2-3 weeks for the actual ECB inflow. HSBC said the rupee sentiment may change on new ECB limit. On the other hand, StanChart said the ECB move means the government is hinting that the rupee fell too much. It also said that inflows will depend on global credit condition.

There could be a two-fold trigger to this: the first trigger quite clearly is forex. The ECB curbs were put-on primarily because the capital flows were so huge. There were clearly people taking advantage of the arbitrage of higher interest rates and currency appreciation in India. Now, that capital flow has clearly dwindled, portfolio flows have dwindled. In the past couple of weeks, it was actually negative over a billion dollars in just one-week. So, that capital flow problem is over. So why not allow capital for productive purposes like ECBs?

One of the triggers is the huge capital flow problem. Rupee appreciation is not on the cards for the moment. A lot of people were even expecting the rupee to go to 44; that is the first trigger.

The second milder trigger could also be that one doesn't want growth to be hurt. One saw that tone in the Reserve Bank credit policy, that they wanted to be cheerleaders for growth, they didn't want to hurt growth. That is why the rate hike perhaps also didn't come.

Now, with the money getting appropriated by the oil companies for the under recoveries, the amount of money available for core projects, especially for the ultra mega-power projects could dwindle. They don't want to ration credit quite clearly and that is why that is also being allowed.

Clearly, this doesn't mean that money is going to be available cheap. If inflation goes up, then probably interest rates would be hiked. But money would always be available at a probably higher price. They don't want to ration credit. So clearly, one reason could be the forex front and the other is to protect growth.

We may not see too much of a hike in Gilt prices, maybe the 10-year bond yields will come off a little bit but the impact will more be at a shorter end. There will be an impact on the rupee. The dollar could get as cheap as 42.50 in early trades itself and maybe in the days to come, going towards 42 is certainly not ruled out.

On this move, Chanda Kochhar , Joint MD, ICICI Bank , said, "I think it is going to have a very positive impact on various things. One is on keeping the investment momentum on in the country. And second, also on the rupee-dollar rates. As we've always been saying that there is a very healthy project pipeline in the country and clearly increase in these limits is going to continue to fuel that project pipeline. The change in the interest rate ceiling also means that not only are the ceilings enhanced, but actual money can come in."