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Domestic, Overseas Borrowing Regulations Eased

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India sought to to lower borrowing costs for local companies on 23 August by allowing them to issue rupee bonds guaranteed from higher-rated offshore entities These measures are, however, unlikely to provide significant relief from high domestic interest rates.

Even on 23 August, the Reserve Bank of India (RBI) said that fighting inflation remained the cornerstone of its monetary policy, and urged the government to cut expenditure, indicating it was unlikely to act soon to ease rates despite slowing growth. "With limited fiscal and monetary space available to provide a direct stimulus, an expenditure-switching policy is needed that reduces revenue spending by cutting subsidies and using the resources so released to step up public capital expenditures," RBI said in its annual report for 2011-12 fiscal ended on June 30.
The measures come after newly-appointed Finance Minister P. Chidambaram prioritised bringing down borrowing costs for companies and consumers, given the central bank has clearly expressed its reluctance to cut interest rates.
Previously only infrastructure and infrastructure finance companies could issue rupee-denominated bonds with guarantees from multilateral institutions with higher credit ratings.
The guarantee from offshore entities enhances the credit ratings of the bonds they chose to guarantee, benefiting lower-rated borrowers, although banks would still be excluded from guaranteeing the debt given central bank restrictions.
Still, analysts cautioned the moves announced late on Wednesday would likely benefit Indian units of foreign companies most, while others may struggle to find sponsorship.
"Bringing in more entities to credit-enhance is definitely a positive," S.J. Balesh, Senior Director, Infrastructure Development Finance Co.
"But having said that, I am not sure how many offshore entities are really ready to credit-enhance any Indian issuer."
Chidambaram said high borrowing costs were a key concern in his first remarks to the media after his appointment this month.
The actions targeting credit guarantees would especially benefit sectors such as telecoms and energy, where foreign companies often operate via Indian units.
Foreign investors will also be allowed to invest up to $5 billion in these credit-enhanced rupee bonds, although the overall corporate bond limit will remain at $45 billion.
The minimum maturity of bonds issued by these domestic units has been reduced to three years from seven years.
Indian companies have been constrained in raising funds due to high domestic interest rates and difficulties in tapping markets overseas. The Reserve Bank of India has kept the repo rate, India's main lending rate, at 8 percent since April.
A top-rated corporate can raise funds locally at 9-11 percent, while it can borrow overseas at 6-7 percent, excluding hedging costs, according to bankers.
However, only higher-rated companies have access to overseas markets, prompting the government to also announce the removal of some restrictions for external commercial borrowings.
Among the new measures, India will allow state-run refinance institution such as Small Industries Development Bank of India or National Housing Bank to tap overseas funds to then lend on to medium and small enterprises and housing finance companies.
India will also allow infrastructure and manufacturing companies looking to refinance rupee debt to tap overseas loans of up to 75 per cent of their average forex earnings over the previous three financial years from 50 per cent.
Worsening Investment Climate
Attributing slowdown to a combination of domestic and global factors, the report said, "Global macroeconomic and financial uncertainty, weak external demand, elevated prices, widening twin deficits and falling investments combined to adversely impact domestic growth."
On the slowing investments, it said, "the investment climate worsened due to structural impediments, policy uncertainties inflation persistence and rising interest rates." .
The economic growth slipped to 6.5 per cent, 0.2 per cent lower than the crisis year of FY'08, last fiscal as the elevated interest kept companies off implementing their investment plans, while despite nearly three years of anti-inflationary stance, inflation remained elevated.
For July, the headline inflation dipped to 6.87 per cent, but still above the comfort level of RBI. Following this almost every agency has lowered the growth projection for this fiscal to a low of 5.3 per cent to 6.5 per cent.