It has also opened up the route for FIIs to set up dedicated debt funds in the country. Earlier, the FIIs were restricted to parking only 30 per cent of their corpus in debt instruments and hence automatically precluded the operation of dedicated debt funds, senior finance ministry officials clarified.
The decision is also perceived as another gradual step towards achieving full convertibility on the capital account of balance of payments. This will permit free flow of foreign capital into and out of the country.
At present, while the rupee is already fully-convertible on the current account, under the capital account, FIIs are permitted to freely repatriate, while resident Indians are bound by restrictions.
Finance ministry officials admitted that fresh acquisition of corporate debt by FIIs will add to the country's external debt burden.
This was the case earlier too, but restricted to 30 per cent. What we have done now is to remove the ceilings and permitted them to go the full distance, the official said.
The main sources of borrowing are largely dictated by norms determined by the finance ministry. They are essentially effected through external commercial borrowings and annual aid disbursement.
While annual aid disbursement has been declining in recent years, the ministry has fixed an annual cap of $7 billion on external borrowings.
Economists were of the view that this move will make it easier for corporates to borrow. It will permit conversion of rupee into foreign debt. Essentially, a corporate has been permitted the backdoor to raise funds from foreign sources. It will make it that much easier to borrow, an economist said.
Another trade economist said there was no need to be alarmist, especially since the outlook on the balance of payments was comfortable.
The finance minister had on Friday, last week, stated in Parliament that the outlook on the balance of payments was bright and went on to announce full redemption of the $2.2 billion owed under India Development Bonds.
Replying to the budget debate in the Lok Sabha, the finance minister said foreign investment inflow in the current financial year will aggregate $7.5 billion. The minister expects accruals of $2 billion under FIIs, $1.5 billion as GDR receipts and $3-3.5 billion as foreign direct investment.
On the balance of payments outlook, the minister emphasised that the country could not afford to draw down the reserves beyond $17 billion equivalent to three and a half months of imports.
According to him, the outgo in the current year would aggregate $17 billion.
This will be made up largely of $10 billion as debt servicing and $2.2 billion on India Development Bonds.
The inflows, made up of external commercial borrowings and gross disbursements of external aid, in the same period, are expected to be $9 billion. Another $0.5 billion was expected by way of NRI investments.
This left a deficit of $7.5 billion which has to be bridged through additional foreign investments. We need more foreign capital. But this cannot happen by itself. We need to ensure macro-economic balance, he had said.
