India relaxes overseas borrowing rules, allows yuan debt

By Rajesh Kumar Singh and Arup Roychoudhury

NEW DELHI (Reuters) - India has relaxed its overseas borrowing rules allowing firms to raise Chinese yuan-denominated debt and raising the borrowing limit for companies in an attempt to woo capital inflows amid heightened global uncertainty.

The move will help Indian firms, suffocated by high local interest rates, to raise cheaper debt. Rising cost of credit in the domestic market has impacted investment demand in Asia's third-largest economy.

"For the first time, we are taking yuan as a currency. There will be a limit of $1 billion to begin with. It is within the $30 billion limit," R. Gopalan, economic affairs secretary at the finance ministry, said on Thursday.

India currently allows overseas borrowing in U.S. dollar, euro, Japanese yen and British pounds.

The decision to add yuan-denominated overseas debt is significant amid increasing significance for the Chinese currency and the development of a rapidly growing offshore yuan market in Hong Kong.

"Cost of borrowing is far less from China," said another finance ministry official.

The government also raised the amount a corporate can raise without seeking the central bank's approval to $750 million from $500 million during a financial year.

The government also allowed companies to refinance rupee debt through overseas borrowing, but retained the $30 billion overall cap on firms' overseas borrowing during a financial year.

Indian corporates have raised debt of about $16 billion between April and July from offshore markets.

"The view taken was if there is a need for additional money through the ECB (external commercial borrowings) route for infrastructure, we will consider that positively," Gopalan said.

The liberalisation of overseas borrowing rules is expected to help the Indian rupee, which plunged to a near two-year low against the U.S. dollar on Wednesday following foreign fund outflows.

Worries that Europe's debt problems could snowball into a banking crisis have roiled global markets and pushed investors towards perceived safe-havens like the U.S. dollar.

The partially convertible rupee has shed 7.75 percent since touching this year's high of 43.855 against the U.S. dollar on July 27.

There were reports that the Reserve Bank of India had intervened in the foreign exchange markets on Wednesday to prop up the rupee.

(Writing by Abhijit Neogy; editing by Malini Menon)