Overseas loans put on hold

RBI, govt concerned over inflationary impact of rising capital inflows.

The government has given the Reserve Bank of India (RBI) in-principle approval to put on hold all overseas borrowing proposals in view of rising rupee liquidity caused by capital inflows and its potential inflationary impact.

Sources close to the developments said approvals for external commercial borrowings (ECBs) have been kept in abeyance till the central bank is equipped to adequately manage growing rupee liquidity.

Around 80 ECB proposals are pending for approval from RBI and are now unlikely to get clearance.

In August, the government had disallowed overseas borrowings above $20 million for rupee expenditure. Any fund-raising plan above $20 million for rupee expenditure requires RBI approval.

In 2006-07, about 45 per cent of the borrowings of about $25 billion were for rupee expenditure. In the first three months of 2007-08, companies borrowed over $7 billion overseas.

In effect, the entire ECB route "� whether automatic or approval-based "� will be regulated as the government and the RBI fight to curb capital inflows and check the inflationary expectations in the economy.

The approval route requires prior RBI clearance. The automatic route requires borrowers to report the borrowing programme after raising the funds.

Proposals under the automatic route now have to be vetted by RBI's empowered committee if the funds are needed for rupee expenses.

RBI has also instructed banks to submit to it proposals under the automatic route before the funds are syndicated to check details like intended end-use and type of lenders.

Inflation, which ruled above 6 per cent in the earlier part of the year, has since been falling and touched 3.11 per cent for the week ended November 3. The fall, however, is mainly because it is measured against a high base in the same period the year before.

Concerns on inflation, however, have been heightened with rising crude oil prices, which touched $ 96 a barrel last week and the fact that the "base-year effect" might wear off.

RBI is also reviewing the liquidity adjustment facility (LAF) used to infuse or absorb liquidity from the banking system.

The review is aimed at equipping RBI with more government securities to conduct money market operations without having to excessively depend on the market stabilisation scheme (MSS) or frequent hikes in the cash reserve ratio (CRR).

The MSS involves issuing bonds and treasury bills at market rates to suck out excess liquidity. It involves a cost to the government and the MSS ceiling has been raised five times this financial year from Rs 95,000 crore in April to Rs 2,50,000 crore.

CRR is the proportion of deposits kept by banks with RBI. It has been raised four times since the start of the financial year from 6 per cent to 7.5 per cent.