ECB vs. FII limits

Which is better? Raising the ECB limits for Indian corporates? Or raising the limits for FIIs to invest in Indian bonds?

The finance ministry and RBI jointly fix an annual limit for debt raising by Indian corporates abroad. Progressively, the cap has been raised and during the last fiscal, local firms are reckoned to have raised over $20 billion.

Over a month ago, the combined ceiling for investment by foreign portfolio investors in local corporate bonds and government securities was enhanced to $8 billion from $2.5 billion. Of this, the allocation for investment in corporate bonds stands at $3 billion.

The finance ministry has made out a case for a major revision in the policy on foreign borrowings to allow an investment of over $15 billion by foreign portfolio investors (FIIs) in rupee-denominated bonds issued by Indian corporates. The ministry’s argument is that allowing higher investment by foreign portfolio investors in local corporate bonds would make better economic sense rather than consistently raising the limit for Indian firms to borrow from the overseas loan and capital markets (ECBs).

Increasing the allocation for investment in local corporate bonds and cutting down on the entitlements for Indian firms to borrow abroad would mean shifting the currency risk on to foreign investors. Besides, the ministry believes that the move to allocate a large share for corporate bonds could add to the liquidity of firms here.

However, the RBI reportedly has not exactly warmed up to the idea. It appears to be concerned about monitoring the end use of funds raised by issuing corporate bonds.