NEW DELHI, 9 August 2007 — India has placed curbs on overseas borrowing to cut massive foreign currency flows into the economy that led the rupee to strengthen sharply against the dollar this year, officials said yesterday.
The country’s Finance Ministry said Indian companies that borrow more than $20 million from overseas must now seek central bank approval for the loan as well as permission to bring the money home.
“Henceforth external commercial borrowing (of) more than $20 million per borrowing company would be permitted only for foreign currency expenditure for permissible end-uses,” it said in a statement. “Such funds would continued to be parked overseas until actual requirement.”
The move was expected to sharply curtail a splurge by Indian companies seeking credit from abroad which comes at rates of interest as much as four percentage points below rupee loans.
In the financial year ended March overseas borrowing by Indian firms rose more than 700 percent to $24 billion.
At the same time, Indian firms have bought dozens of companies abroad in deals that totaled $26 billion including Tata Steel’s buyout of Britain’s Corus at more than $12 billion.
The borrowing has combined with billions of dollars invested in India’s stock market since the start of the year that led the rupee to gain 10 percent to a near decade high of 40.28 against the dollar by July end.
Yesterday, the rupee fell to 40.58 against the dollar from 40.37 Tuesday.
“The RBI (Reserve Bank of India) is sending the signal that companies should borrow money from local sources rather than from overseas,” said Ashwin Mehta, an analyst with brokerage Ambit Capital.
“This could help keep the rupee above the 40 level,” he said.
India already has curbs on overseas borrowing and strict rules on share swaps that make it necessary for many companies seeking to buy assets abroad to pay cash raised both locally and abroad.