- The Reserve Bank of India (RBI) has eased hedging norms for companies that raise funds through external commercial borrowings (ECBs).
- According to a notification issued by the central bank, the mandatory hedge coverage has been reduced from 100% to 70% under Track I of the ECB framework.
- The relaxed norms will apply to the ECBs with a maturity period between 3 and 5 years.
- The RBI also clarified that the ECBs raised prior to this circular would be required to mandatorily roll over their existing hedge only to the extent of 70% of outstanding ECB exposure.
- The cost of hedging has gone up in the last six months with the strengthening of the dollar and as a result, the ECB route was becoming unattractive to firms.
- Moreover, In recent months, the cost of borrowings in markets abroad has also gone up, partly because of the spike in interest rates in the US and also because the spreads have widened, especially for companies in the emerging markets.
- In September, ECB borrowings totalled $1.7 billion, far lower than the $4.8 billion raised in August. In July, the borrowings were $2.2 billion.
- The liquidity crunch which plagued the non-banking finance companies (NBFCs) has also persuaded RBI for further easing the ECB norms.
- The move is seen as a step to support the credit market as well as resolve the differences that RBI had with the government on the liquidity issue.
- It will lower the cost of hedging and will help reduce costs for companies that raise foreign funds.
- Higher ECB inflows could also lead to further strengthening of the rupee.
- The move could let Corporate India, especially the larger companies and banks, raise foreign debt under more competitive terms, in turn making available more domestic bank capital for small and medium businesses.
- It would also enable stronger banks to address the refinancing needs of NBFCs.
According to RBI, Track I refers to medium-term foreign currency-denominated ECBs with a minimum average maturity of 3-5 years.
- ECBs are commercial loans – bank loans, securitised instruments, buyers’ credit, suppliers’ credit, foreign currency convertible bonds etc, raised by resident entities from recognised non-resident entities minimum average maturity of 3 years.