By PRASANTA SAHU and ANANT VIJAY KALA
The Indian federal government Wednesday eased rules governing overseas borrowing, hoping to ease borrowing by local companies and spur capital inflows.
In one of the most significant elements of the change, the government raised by 50% the limit on rupee loans that infrastructure and manufacturing companies are allowed to refinance through overseas borrowings.
Such companies will be able to refinance these loans by up to 75% of their average foreign-exchange earnings over the past three years, up from the previous limit of 50%, the finance ministry said.
Companies importing capital goods for use in the infrastructure sector will also not require government permission to raise overseas loans to refinance existing loans.
The measures are designed to boost investment in the country’s creaky infrastructure, which by some estimates cuts about two percentage points from India’s annual economic growth.
The government also allowed foreign entities—primarily lenders—to guarantee rupee bond issues of all local companies and slashed the minimum maturity period of such bonds to three years from seven.
Earlier, foreign lenders were only allowed to guarantee rupee bond issues of infrastructure companies.
The government also allowed foreign funds to invest up to $5 billion in these bonds. The investments will still fall within an existing overall cap of $45 billion on foreign institutional investments in local corporate bonds, which remains unchanged.
The credit guarantee will allow local companies to attract foreign funds to invest in these issues.
The steps come against a backdrop of a sharply slowing Indian economy. Growth has slumped to its weakest in nearly a decade, inflationmeanwhile, remains high and the government is struggling to control wide fiscal and current account deficits.
Weakening exports, coupled with a flight of capital due to deteriorating global conditions, have also contributed to a sharp fall in the local currency.Analsyts noted that foreign investors are permitted to buy up to $25 billion in long-term infrastructure bonds issued by local companies, but the allowance is under-used due to subdued foreign interest in such debt.
The rupee has weakened about 17% against the U.S. dollar over the past year.
However, some observers questioned how much the steps will help attract inflows, as similar previous measures haven’t had a significant impact.
The government Wednesday also allowed housing-finance companies to raise overseas loans to fund low-cost housing projects. The decision has been extended to include the state-run National Housing Bank, which refinances housing finance companies.
It also allowed state-run Small Industries Development Bank of India to raise overseas borrowings to finance small and medium-size enterprises.
Write to Prasanta Sahu at email@example.com and Anant Vijay Kala at firstname.lastname@example.org