ECB RELAXATION

People are yet to get over the historical collapse of the US financial markets last week and the resultant meltdown on Dalal Street. Yesterday’s run-up on the price of crude led to some more anxiety. And in all this anxiety, a news which otherwise would have boosted the markets, went seemingly unnoticed.



Yesterday evening, the Govt relaxed norms for External Commerical Borrowings (ECBs) for infrastructure projects. This means that companies engaged in building ports, airports, roads, bridges, power and telecom, could, till yesterday, borrow only upto $100 million a year for rupee spending in India. But from today, they can now borrow 5 times more – the limit having been increased to $500 million per year. These ECBs would have a minimum repayment period of seven years, obviously meaning that only projects with long gestation periods, mainly infra projects would thus be able to access these ECBs.



For ECBs of three to seven years tenure, the borrowing rate has been left unchanged at 200 to 350 bps plus LIBOR. For borrowings between five-seven years, the all-in-cost ceiling has also been left unchanged at 350 bps while for those above seven years; the rate has been relaxed from 350 to 450 bps above LIBOR.



This is good news. Good because it indicates that the Govt is going ahead with its promised eye on reforms. Maybe in the current scenario, where even companies with a strong balance sheet might find it difficult to get funding, for the long term, this is a positive move. The relaxation of the ECB norm, as experts say, might help bring down the dollar vis-à-vis the rupee. But probably, another way to look at it is that Govt is seeing the rupee at stronger levels in the months to come. So maybe right now, this news may not make much sense given the volatile rupee and dollar tussle. This, run up on the dollar, many say, is an aberration and once things settle down a bit, the rupee would also stabilize at better rates. So once that happens, this ECB relaxation will make a lot of sense.



Interest rates on the overseas markets would come at a much cheaper rate for large borrowings and for such long tenures would make more sense to borrow abroad than to borrow in India, where the interest rates would be higher.



What this also means is that, to a very large extent, the India growth story, as the Govt sees it, remains intact. Given the turmoil world over, India, to a large extent has remained more resilient. Unlike the US, which is the world’s largest economy, shocked everyone by overleveraging itself to just one sector and allowed that one sector to bring down the entire financial pillars of the country. To that extent, we should be thankful that India is not a “card swiping” economy, basing all its growth on the housing sector. So when the growth of India is still driven by the core sector, and with the impetus now being given to the Govt, the infra sector, which is expected to need around $500 billion by 2012 would find many takers for the ECBs.



The realty sector does not qualify for this increased ECB limit. The ECB ceiling for companies other than infrastructure companies stays unchanged at the previous $50 million. And taking a lesson or two from US, the Govt would not be in a hurry to relax this limit for realty companies any time soon. Little wonder then that the realty stocks were sulking at lower levels on the bourses today.



The rising crude has given the jitters once again, raising concerns of inflation and growth and dollar rates. Undoubtedly, this relaxation of the ECBs limit for infra is a step in the right direction but it will take some time to get to the desired destination. Its like the story of Birbals’ khichdi – the ECB right now is like the light to the man in the cold water in the night; it brings warmth to know that more ECB is now available; we just have to get through this long, dark night.