External Commercial Borrowings (ECB) Limit raised to $30 billion from $20 billion
Economy Current Affairs 2011. External commercial borrowing limit raised to $ 30 billion from $ 20 billion for the financial year 2011-12
A high-level coordination committee on external commercial borrowings (ECB), chaired by R Gopalan, secretary department of economic affairs in a meeting on 27 May 2011 decided to raise the external commercial borrowing limit to $ 30 billion for the financial year 2011-12. The corporates can now borrow more overseas because the government has raised the overall limit for such borrowings substantially from $20 billion to $ 30 billion.
Borrowing costs for the industry shot up with the Reserve Bank of India raising key policy rates to tame the runaway inflation at 8.7% in April 2011. The central bank had lifted the policy rates by 50 basis points in its last monetary policy review, its ninth increase since March 2010.
Following the RBI’s move almost all banks including the country's biggest bank, State Bank of India lifted its base rate in stages to 9.25% from 7.5% in July 2010.
Monetary tightening led to increase in borrowing costs for the industry with most banks raising interest rates, raising fears of a slowdown in investments. High interest rates is likely to dampen industrial output which rose to a five-month high of 7.3% in March 2011.
According to industry experts say the move to raise ECB limit will largely help the industry fund its capital expenditure through cheaper funds abroad. It will help manufacturing and infrastructure sector raise more cost effective funds overseas. Companies in services sector IT, hospitals and hotels would also be able to utilise the additional borrowing limit to fund its equipment purchase.
Economists are of the opinion that the upwards revision in the limit will not only help industry raise cheaper finance overseas but also help the government in managing capital flows, needed to finance the current account deficit.
The annual cap for external commercial borrowings is fixed every year at the beginning of the financial year taking a stock of overall economic situation, current account deficit and also industry's requirements. The government has continuously relaxed the overseas borrowing policy.
Finance minister Pranab Mukherjee had in the budget 2011-12 announced relaxation in investment limit for foreign institutional investment in corporate bonds, with a residual maturity of over five years and issued by companies in the infrastructure sector.