The rupee as a sequel to the government's announcement of fresh restrictions on External Commercial Borrowings (ECBs) turned volatile in the intra-day trading and ultimately closed at Rs. 40.52 registering a loss of 12 paise which amounts to around 1%—all in a day's trading on 9th August.

Market reactions aside what is more important here are the restrictions per se and their impact on the macroeconomic fundamentals. As a result of the restrictions imposed companies can now raise ECBs for rupee expenditure only up to $20 mn that too with the prior approval of the Reserve Bank of India. Corporates are also required to park such borrowings overseas till the rupee expenditure materializes. The current restrictions have two implications: one the need for the nod of the RBI disables companies from timing their ECB borrowings to their advantage; and two for anything beyond $20 mn companies have to approach the local market. The ECBs above $20 mn can of course be availed of only for incurring permissible expenditure in foreign currency.

Palpably the motive behind the current restrictions is to strengthen the hands of the Reserve Bank of India in imposing stricter discipline under its ongoing conservative monetary policy. Admittedly `plenty' of foreign capital is always a problem to manage. In the last six months alone it is reported that Indian companies have borrowed $19.13 bn from global financial markets as against $13.58 in the whole of 2006. Similarly inflow through FIIs has also gone up.

The inflow of foreign exchange in excess of a country's absorbing capacity poses many problems. One such major problem is the appreciation of domestic currency. Such appreciation is more acute when the central bank withdraws from its market intervention as is currently happening. Rupee has thus appreciated in the recent past by 9% creating ripples in the corporate corridors for it made Indian exports less competitive in the global markets besides eroding their profit margins. An excess inflow of foreign exchange also results in the rise of reserve money and broad money which indeed rose by 60.7% and 64.3% respectively by March 2007. Such rise in monetary base automatically makes more bank credit available.

The Analyst Magazine, External Commercial Borrowings, ECBs, Reserve Bank of India, Global Financial Markets, Foreign Institutional Investors, FIIs, Foreign Exchange Markets, Economists, Gross Domestic Products, GDP, Blue Chip Companies, Global Economy, Indian Companies.