VZCZCXRO7019
PP RUEHAST RUEHCHI RUEHCI RUEHLH RUEHPW
DE RUEHBI #0246/01 1511213
ZNR UUUUU ZZH
P R 301213Z MAY 08
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 6303
INFO RUEHNE/AMEMBASSY NEW DELHI 7532
RUEHBI/AMCONSUL MUMBAI 1419
RUEHCI/AMCONSUL KOLKATA 1569
RUEHCG/AMCONSUL CHENNAI 1761
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCNIND/ALL INDO COLLECTIVE

UNCLAS SECTION 01 OF 02 MUMBAI 000246 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD EINV IN
SUBJECT: BABY STEPS: EXTERNAL COMMERCIAL BORROWING NORMS AND DEBT 
INVESTMENT LIMITS RELAXED 
 
 
MUMBAI 00000246  001.2 OF 002 
 
 
¶1.  (U)  The Reserve Bank of India (RBI) and Ministry of Finance 
(MoF) relaxed norms on external commercial borrowings (ECBs) on 
May 30.  The announcement relaxed restrictions in three distinct 
areas.  First, the limit on borrowings by companies for rupee 
expenditures was raised from USD 20 million to USD 50 million 
with companies seeking loans for infrastructure projects able to 
borrow USD 100 million. The USD 500 million per company per year 
limit for overseas borrowings in foreign currencies without 
rupee expenditures under the Automatic Route - requiring no RBI 
approval -- was kept unchanged.  Also left unchanged were the 
restrictions on Indian banks serving as guarantors on foreign 
loans.  Second, the cost ceilings (caps on interest rate 
charges) for ECBs were also raised.  The ceiling on 3 to 5 year 
maturity loans was raised from 150 to 200 bps over the London 
Interbank Offered Rate (LIBOR), while the cap on loans over 5 
years was raised from 250 to 350 bps over LIBOR.  (Note:  By 
limiting the amount over LIBOR at which companies may borrow, 
the RBI was able to restrict lending to companies with high 
credit ratings, i.e. large firms. Raising this ceiling could 
potentially expand the number of companies eligible for credit, 
especially as interest rates have risen.  End note.)  Third, the 
overseas investment limit on corporate bonds was raised to USD 3 
billion from USD 1.5 billion, and on government bonds to USD 5 
billion from USD 3.2 billion. 
 
¶2.  (U) Salim Gangadharan, Chief General Manager-in-Charge of 
Foreign Exchange at the RBI told Congenoff that the changes were 
designed to help all sectors, not only the Small and Medium 
Enterprise (SME) sector.  Capital flows had moderated over the 
last several months, so after a review of the macro-economic 
conditions and talking with industry players, the RBI and MoF 
decided to raise ECB limits.  He commented that depending on how 
markets and companies respond, these limits could be raised or 
lowered after another 3-4 months.  He said there was great 
interest from FIIs to invest in the debt sector, which is why 
the overseas investment limit for the bond market has been 
raised as well. 
 
¶3.  (U) Dr. Atsi Sheth, Chief Economist of Reliance Capital, 
informed Congenoffs that the steps taken were expected but not 
monumental changes, and might help only at the margins.  The 
impetus for the changes was that the Indian rupee was 
depreciating, the current account deficit was widening because 
of escalating oil prices, and capital inflows had slowed down 
because the correction in the Indian equity market.  In other 
words, the RBI thought it would be easier for the Indian economy 
to absorb the increased capital flows resulting from the 
loosened restrictions and be balanced by the increased outflows 
because of high oil prices.  Ashish Ghiya, Managing Director of 
Derivium Securities, a bond trading platform, echoed the view 
that these moves were made more to manage foreign exchange flows 
than help the overall economy.  He commented that last year, too 
many dollars flowed in so ECB restrictions were tightened; but 
this year with inflows slowing down the restrictions are being 
loosened to encourage more dollar inflows to balance the oil 
account.  However, he did not see an immediate dollar rush into 
India. 
 
¶4.  (U) Sheth pointed to the lifting of the overseas investment 
limit on corporate and government bonds as being particularly 
smart.  Her conversations with foreign institutional investors 
(FII) confirmed RBI's statement that FIIs are increasingly 
looking at Indian fixed income markets as an attractive 
investment alternative to the volatile equity markets.  (Note: 
Most market participants and several Government of India 
High-Powered Expert Committee Reports point to greater FII 
participation as a prerequisite for corporate bond market 
development.  End Note.)  Pankaj Vaish, Managing Director and 
Head of Equities and Fixed Income at Lehman Brothers, also 
agreed but thought that the overseas investment limit needed to 
be raised to at least USD 25 billion to attract significant FII 
interest in the Indian debt market.  Sheth countered that while 
the limits are still tiny compared to the mountain of foreign 
capital available to invest in the fixed income markets if 
restrictions were abolished, the RBI was wary of doing so.  She 
noted that the GoI and RBI had thoroughly studied the Russian 
and Asian financial crises of the late 1990s which were led by 
volatility in their fixed income markets; she believes that 
given this history and the RBI's traditional caution, the RBI 
will not allow the complete liberalization of or significant 
increases of overseas investment limits in Indian fixed income 
 
MUMBAI 00000246  002.2 OF 002 
 
 
markets. 
 
¶5.  (U) Sridhar Prabhu, a fixed income analyst at CRISIL, a 
local bond ratings agency, welcomed the hiking of the cost 
ceiling on ECBs.  He stated that this was a badly needed move 
because previous cost ceilings were not attractive for lenders. 
He described the new restrictions as "more reasonable."  Vaish 
of Lehman Brothers disagreed with the  CRISIL view, pointing out 
that the new cost ceilings are still not realistic for the 
market.  He claimed that SMEs are being quoted rates of LIBOR + 
500 bps, making ECBs beyond their reach under the new ceiling. 
 
¶6.  (U) P.V. Rao, Senior Vice President & Head-Resources of 
IL&FS, noted that while the relaxation in ECB limits is "good 
news" especially for companies engaged in infrastructure 
activities, the restrictions on end-use remain in place.  The 
increased foreign borrowing available through ECBs therefore 
cannot be used for corporate lending or investment in the 
capital market, for acquisitions of Indian companies except by 
banks and eligible financial institutions, for replacing working 
capital, financing real estate, or repaying existing rupee 
loans.  Rao also pointed out that ECBs under the new caps fall 
under the approval route and will require prior approval of the 
RBI.  In a research note, Shuchita Mehta, senior economist at 
Standard Chartered, felt the RBI would use the approval process 
to ensure ECBs do not flood in. 
 
¶7.  (U) Representatives from the project finance groups of 
Government-owned State Bank of India (SBI) and Industrial 
Development Bank of India (IDBI) also gave positive assessments 
of the moves, particularly the relaxation of interest rate 
ceilings.  Both thought the increased ceiling for infrastructure 
projects was overdue, and will help address the infrastructure 
bottlenecks plaguing the Indian economy.  However, the 
representative of IDBI expressed disappointment that Indian 
banks are still prevented from co-guaranteeing loans with 
External Credit Agencies. 
 
¶8.  (U) Comment:  While many market players obviously hoped for 
more from this move, all recognized that the RBI's changes are a 
step in the right direction.  Whether these steps result in 
increasing capital inflows, either through ECBs or the bond 
market will be closely watched.  End Comment. 
OWEN