Borrowing limit one of few RBI tools

The Reserve Bank of India's (RBI) move to curb companies from bringing home overseas funds is probably one of the few weapons the government has to check record capital inflow without hurting investor confidence in the country, economists said.

The government yesterday imposed curbs on companies seeking to borrow from overseas to slow foreign-exchange inflows, about a week after South Korea imposed similar measures to cool the appreciation of the won.

The country is trying to cool foreign-exchange inflows that sent the rupee to a nine-year high and weakened exports, which make up a third of the $854 billion economy. Finance minister Palaniappan Chidambaram today said the measures won't hurt investments and slow economic growth.

``Curbs on external commercial borrowings is probably the only step India could have taken,'' said Sebastien Barbe, the Hong Kong-based senior economist at Calyon, the investment banking unit of France's Credit Agricole SA.

Barbe said the government may not curb foreign investments, which is supporting growth. He expects the rupee to decline to 42.50 by December 31.

Overseas investors sold a net Rs 11.7 billion ($288.7 million) of shares and a net Rs 12.73 billion of equity derivatives on August 6, the stock market regulator and the National Stock Exchange said yesterday.

"India's liquidity problem will ease because investors will exit from their stock investments as the US sub-prime mortgage crisis unfolds,'' said Arun Jain, director at VS Infrastructure Capital Ltd., which syndicates local debt for companies.

``Foreign banks will also be unwilling to fund Indian companies' mergers and amalgamations.'' Indian companies made a record $55 billion of buyouts in the first six months of 2007, according to PricewaterhouseCoopers Pvt.

Defaults in the US subprime mortgage market caused two hedge funds owned by Bear Stearns Cos to default last month. John Stewart, chief executive officer of National Australia Bank, said the US subprime debt problem may last for two years, the Australian Broadcasting Corp. reported on August 5.

India yesterday said that companies borrowing more than $20 million overseas may not remit the proceeds to India, while the central bank's permission will be needed to repatriate funds up to $20 million. Net overseas borrowings by companies surged almost six-fold to $16.1 billion in the year ended March 31 from the previous year, according to the central bank.

Similar measures in South Korea had moderate impact on the won. The won slid 0.2 per cent since August 3 when the Bank of Korea restricted local companies from borrowing in foreign currencies to cool gains in the won and help exporters.

"India's restrictions will have a meaningful impact on the external commercial borrowing inflow,'' said Rajeev Malik, senior economist at JPMorganChase & Co. in Singapore.

"At best, they offer some breathing room to the central bank struggling to maintain a tight policy stance that is being challenged by the glut of capital flows.'' He said India should not restrict foreign investments.

The central bank slowed dollar purchases in March and April to help strengthen the rupee and ease inflation from the two-year high it touched in January.