The
Reserve Bank of India's much hyped
booster dose for a mauled rupee comes with a cost. The central bank's latest move to liberalise external commercial borrowings (ECB) is actually a continuation of its reliance on debt inflows to check the rupee slide. In the last six months, RBI has been increasingly attracting debt inflows through foreign debt, NRE and FCNR (B) deposits.
RBI first deregulated
NRE interest rates in December last year, later relaxed the
FCNR (B) coupon by offering higher interest rates, and soon followed up with ECB relaxation in the Union Budget 2012/13 for aviation, power, roads etc. It permitted refinancing of rupee debt in the Budget for select sectors and also allowed refinancing existing ECBs. Today, RBI, under tremendous pressure from government to protect the rupee from depreciating further, opened the ECB tap further to allow manufacturing as well as infrastructure companies to replace high cost rupee debt among other measures.
The share of
ECBs in external debt is on the rise for the last few years. According to available statistics, the share of ECB has jumped from 20 per cent in 2004-05 to nearly 30 per cent in 2011-12. The impact of current ECB relaxation in 20012-13 would be visible by the end of the year. Experts say the depreciating rupee will increase the interest burden of corporate sector availing ECBs and also impact their balance sheet in future. With the expansion of GDP plunging below seven per cent and dollar gaining strength in view of the Euro crisis, the rupee is expected to depreciate further in future. It doesn't help that there is also no visibility of buoyancy in foreign direct investment inflows because of political compulsions and other issues at the ground. The FIIs inflow, too, won't return anytime soon because of stressed balance sheet of companies and depressed sentiments in the equity market.
If one analyses RBI's measures on Monday, the debt inflows suit RBI and the government as ECBs transfers the currency risk to corporate books. Ditto for NRE deposits: the risk of currency depreciation is on the NRIs or the responsibility of profitably deploying the dollar proceeds falls in bank. Today, there is already a big demand for NRE deposits with high interest rates as compared to other markets. There is also a huge arbitrage opportunity in the case of NRE bank accounts - borrow money locally and park money in India. This has already resulted in NRE deposits crossing $10 billion in 2011-12 as against a meagre $3.2 billion last financial year. If the currency risk on such deposits goes against the depositor, of course, one could see an outflow from India.
NRE deposits are classified as very volatile short term debt inflows. In the past, these deposits were the first to flee Indian on any political instability or other country specific bad news. Banks, already faced with asset quality issues, will inherit another problem if they keep taking on deposits at a high cost with no opportunity to deploy them as interest rates expectations are on the lower side.
Today, the ECB and NRE deposits combo already have a share of over 40 per cent in the India's external debt. Clearly, the ECB and NRE deposits are short-term measures for a problem that requires longer term solutions. And this may provide a breathing space to government for a while, but create bigger headache for the RBI in future.
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