oppn parties External Commercial Borrowings: Good Route If Used Wisely

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  • EMI's set to rise after the RBI hikes key policy rate
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  • Supreme Court says that a delayed order of preventive detention makes it invalid
  • Shashi Tharoor posts an erronous map of India in his manifesto, rectifies the error after criticism
  • Sonia Gandhi to take a call on who will be Rajasthan chief minister
  • Mallikarujun Kharge to be the new candidate to oppose Shashi Tharoor in the Congress presidential elections
  • RBI says that the September inflation rate may be higher than 7%
  • RBI hikes key rates by 50bps, downwardly revises FY23 growth rate to 7% from 7.2% earlier
  • Stocks recover well on Friday: Sensex gains 1016 points to0 57426 and Nifty 276 points to 17094
  • Mirabai Chanu wins gold easily at the National Games
  • In a first, the Supreme Court recognizes marital rape, although for the limited purpose of allowing married women the right of abortion up to 24 weeks if they conceived as a result of forced sex by their husbands
  • Air India cuts discounts on base fare to students and senior citizens from 50% to 25%
  • Mallikarjun Kharge and Digvijay Singh are being touted as frontrunners to take on Shashi Tharoor in the elections for the post of Congress president
  • Sonia Gandhi will decide who will be Rajasthan CM if she feels there is a need to change guard after the near-rebellion by MLAs in the state
  • Ashok Gehlot bowed out of the race for being Congress president after meeting Sonia Gandhi
RBI hikes key rates by 50bps, stocks jump and recover 50% of the losses incurred in the last few session
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External Commercial Borrowings: Good Route If Used Wisely

By Sunil Garodia

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.

The government, as announced in the budget, has decided to float sovereign bonds and borrow in the international markets. This is both good and bad. It is good because it will free up resources for private players, allow the government to borrow at a much cheaper rate, will bring stability to the Indian rupee and will make the government more responsible in its fiscal policies as overseas bond markets will look more closely at figures such as fiscal deficit. It is bad because by borrowing in external markets, India will expose itself to speculators who can short sell the bonds to create panic. But most experts agree that given India’s strong macroeconomic fundamentals, if external borrowing is done in moderation, the chances of speculation mischief are negligible.

The Indian government is the biggest borrower in the domestic financial market. Since government paper is backed by the sovereign and chances of default are non-existent, lenders prefer to invest in it even though the rates of interest are low. Banks have to put a major part of their funds in government papers as the RBI mandates it. This obviously means that banks and other financial institutions have lower resources for private players. Once the government starts borrowing a part of its requirement in the overseas market, it will free up some resources with banks which they can use to service private borrowers. If the government borrows 10-11 percent of its requirements overseas, as is being indicated, it means around Rs 71000 crore will be freed.

India has one of the lowest GDP to external commercial borrowing (ECB) ratio in the world among the fast developing nations. Lately, the government has further reduced external borrowings. India’s external borrowings dipped by 9% in February this year and over 20% in April compared to corresponding months last year. Since India uses the ECB route for less 3% of its total borrowing, there is immense scope to tap this route. Funds acquired through ECB will come in foreign currency, will be a lot cheaper and there is no liquidity problem in the overseas financial markets. But care must be taken to maintain a healthy ECB to GDP ratio which must not shoot beyond 20%. We have the example of some Latin American countries that were brought to their knees after their ECB shot up to 50% of their gross borrowings. But India has strong fundamentals and is likely to be very prudent in its ECB policies, negating such risks.

pic courtesy:ipleaders blog