Curbs on ECP to hurt

Indian companies, inclined to borrow abroad to benefit from cheaper interest rates, may soon have to contend with rising debt servicing costs, since RBI is planning to introduce further curbs on ECBs to regulate capital inflows. According to bankers, the manufacturing sector could be hit hard.

For a AAA-rated company borrowing abroad for a five-year term at Libor plus 60-100 basis points, the interest differential could work out to 1.5 per cent if it is hedged and 3 per cent if it is unhedged, says a senior banker.

RBI has placed several curbs on ECBs. Companies have to borrow locally for their local capital expenditure needs, but can go for ECBs if they have planned any overseas expansion or acquisition.

According to Sharda Balaji, Company Secretary, Puravankara Projects, restricting Indian companies from borrowing abroad will hit them hard as interest rates within the country are showing no signs of easing. “I don’t see interest rates dropping in the near future,” she says. Surely, a strong currency cuts both ways.