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Changes in the ECB Guidelines
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RBI on 23rd November 2011 announced two major changes in the External Commercial Borrowings (ECB) guidelines.
1. Increase in the ceiling of all-in-costs
In the light of increased credit spreads and tighter liquidity in global financial markets, RBI has increased the all-in-cost ceilings for a 3yr – 5yr tenor ECB by 50 bp, to 6M LIBOR+350 bp. The ceiling for 5yr + tenor ECB remains unchanged at 6 M Libor + 500 bps.
The increased ceiling is to come into effect immediately and will be applicable till 31st March 2012. Thereafter it is subject to review.
2. Parking of ECB Proceeds
RBI has further stated that the ECB raised abroad for the purpose of rupee expenditure have to be immediately converted into rupee and bought to the credit of AD category I bank in India. Also the rupee funds as per the previous guidelines cannot be invested in capital markets, real-estate and inter-corporate lending.
However proceeds of ECB raised to meet foreign exchange expenditure of the project, can be retained overseas. There is no change in this regard and the ECB funds parked overseas, like before are permitted to park into liquid assets like such as CDs, T-bills and other monetary instruments with maturity less than a year and ratings not less than ‘AA-‘.
The above steps have been taken by RBI to ensure availability of long-term funding to the corporate clients in the current times of tight credit and risk aversion. Also one of the motives of RBI is to ensure smooth inflow of FDI flows in to the country , which can also act as a support to stronger rupee.
3. FC – INR Swaps
RBI by a separate measure, removed the ceiling of USD 100 mn on the net supply of foreign exchange resulting from Rupee-FC swaps. As a result, Indian corporates are freer to swap long term rupee loans in to USD notionally, in order to save interest costs. This however would be of limited significance, as the Indian Corporate swapping rupees, say , to USD is not allowed to hedge the currency and interest rate risks for repayment of the notional USD loan.
- Aniket More
(Manager – Strategic Advisory Services)
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