Reining in the rupee

If it was meant to bring a smile to the faces of the exporters and the IT industry, a recent Reserve Bank directive on external commercial borrowings (ECBs) by Indian companies has only eased up their frowns a wee bit. For, as the Finance Minister himself said, the appreciating rupee is a corollary to the booming economy and with it.

The new ECB guidelines mandate that any amount over $20 million that’s raised will be permitted only for foreign currency expenditure and cannot be remitted to India. For amounts less than $20 million for rupee expenditure, the funds need to be parked overseas till actual requirement. While 2006-07 saw some $20.6 billion flow into the country through the route, this year, the ECB figure till July has already crossed $9 billion.

Fears are that companies may no longer find the ECB route as attractive for raising funds as before. “In the long run, the limits will be detrimental as they will throttle supply, and productive capacities will suffer,” says Saurabh Chawla, Executive Vice President, Finance & Head, Investor Relations, DLF. The property giant had opted for a round of ECBs prior to its initial public offering as it was the cheapest form of debt available.

So, what explains the RBI’s diktat? “It’s a short-term measure to arrest liquidity and stem the rupee’s appreciation and clearly, the intention is to force companies who might have been looking at an ECB to opt for domestic borrowing,” observes Prakash Subramaniam, Director and Regional Head, Capital Markets, India and South Asia, Standard Chartered Bank.

Subramaniam, however, cautions that if the new guidelines are here to stay, they will end up creating pressure on liquidity and harden the interest rates even further. “ECBs were attractive for a company as there was a difference of 2 to 3 percentage points when compared with the lending rates of domestic banks,” adds Subramaniam. Exporters for their part say they’ve little reason to celebrate.

“Remittances from ECBs are just one part of forex inflows—much of them come in through foreign institutional investors and foreign direct investments,” says Atul Nishar, Chairman, Hexaware Technologies. “A 2 to 3 per cent rise per annum is gradual enough for the industry to cope with, but a 12-13 per cent appreciation becomes unbearable,” he adds. Hexaware saw Rs 8.14 crore wiped off its bottom line in the last quarter due to the rupee-dollar variation. Even non-IT exporters are feeling the pinch.

Rajan Hinduja, Executive Director, Gokuldas Exports, which suffered by 8 to 10 per cent from the rupee rise, says increasing import content and productivity are the best ways of offsetting the rupee appreciation. Clearly, the ECB restrictions will provide little succour, what with the likes of Subramaniam expecting the rupee to further rise to Rs 38 to the dollar in a year.