India will not raise limits for corporate foreign borrowing despite pressure from firms wanting to tap cheaper funds amid rising rates at home, but may revise interest rate spreads, a finance ministry official said. Smaller firms are finding it hard to raise cash to fund expansion after several rounds of tightening by the central bank.
Analysts say capital inflows have slowed enough to make a further relaxation in external commercial borrowing guidelines possible. But the official, who could not be identified, said the government saw no need to change the rules, while it could consider modifying interest rate spreads. "We have received several representations to revisit the spreads. We are looking into it," the official said.
Last year, the government tightened ECB regulations to reduce high capital inflows which were pushing up the rupee and complicating monetary management. But in May, it raised the proportion of overseas borrowing a company can bring into India. Firms can now borrow up to $500 million a year, but manufacturers are only allowed to bring in to India $50 million and infrastructure companies $100 million. The rest must be invested in units overseas.
In the last two months, the central bank has raised its key lending rate by 125 basis points in three steps in a bit to rein in inflation at 13-year highs, pushing up credit costs. Indian firms currently borrow funds overseas at 200 basis points over Libor for a 3-5 year loan, and the spread is 350 basis points for loans above five years. "Probably the thinking now is to slow domestic demand but the willingness to revisit the spreads is a positive development. Without it, smaller firms are facing problems to raise funds," said D.K. Joshi, principal economist at ratings agency Crisil. Asia's third-largest economy is expected to expand by 8 percent in 2008/09, lower than 9 percent in the previous fiscal year.