Introduction to External Commercial Borrowings
The latest data from the Reserve Bank of India (RBI) reveals that Indian corporations have borrowed $11.04 billion in external commercial borrowings (ECBs) in March, marking a six-year high. This surge in ECBs has sparked debate about whether it reflects growing corporate ambition and global integration or signals persistent weakness in India’s domestic credit architecture. In this article, we will delve into the reasons behind this surge and its implications for the Indian economy.
Reasons Behind the Surge in ECBs
There are two primary reasons behind the surge in ECBs. Firstly, the persistent interest rate differential between domestic and international markets has created a favorable environment for Indian corporations to borrow from abroad. For instance, JSW Steel raised $900 million at an interest rate of 4.4%, which is significantly lower than the domestic marginal cost of funds-based lending rate of nearly 9%. Secondly, the RBI’s liberalized ECB framework, which permits firms to raise $750 million annually under the automatic route, has made it easier for corporations to access foreign capital.
Refinancing Rather Than New Investment
However, a closer examination of the ECB data reveals that much of the recent activity has been directed towards refinancing rather than new investment. According to the RBI’s State of the Economy April bulletin, Indian companies faced $25.8 billion in ECB principal repayments between April 2024 and February. Firms like Mangalore Refinery and JSW Steel have used new offshore borrowings to refinance existing obligations, extend maturities, and manage rollover risk. While this approach may be financially prudent, it does little to catalyze fresh investments in the economy.
Challenges in India’s Credit Intermediation
The growing reliance on ECBs, including for refinancing purposes, highlights persistent challenges in India’s credit intermediation. The domestic credit market has seen significant tightening over the past year, with bank credit growth slowing from 20.2% in FY24 to 11% in FY25. Regulatory actions, such as the RBI’s tightening of prudential norms for unsecured retail credit and NBFC lending, have led banks to adopt a more cautious stance. Moreover, persistent challenges in deposit mobilization have constrained banks’ lending capacities, compounding the strain on capital access for many firms.
Distortions in Financial Intermediation
The distortions in the financial intermediation process are evident when even large, creditworthy Indian corporations find it more rational to assume currency risk than to access domestic capital. From a macroeconomic point of view, this is where the risks loom large. While the rupee has been stable of late, backed by the RBI’s robust foreign exchange reserves and gold holdings, this calm is not guaranteed. India’s geopolitical neighborhood remains volatile, as does global risk sentiment. A sudden Fed pivot, a commodity shock, or a trade conflict could easily pressure the rupee, and firms with unhedged or poorly matched external liabilities could face severe stress.
Systemic Implications
There are systemic implications to the surge in ECBs as well. The concentration of ECB activity in sectors with cyclical revenue patterns and entities with potential asset-liability mismatches creates correlation risk that could amplify financial system stress during an economic downturn. Moreover, the preference for offshore borrowing could slowly erode the depth of domestic capital markets. If large, creditworthy corporates increasingly bypass Indian banks and bond markets in favor of foreign capital, it leaves the domestic system to cater largely to sub-prime borrowers, the government, and small businesses.
Conclusion
In conclusion, while the surge in ECBs may seem like a positive development for Indian corporations, it has significant implications for the Indian economy. The RBI must tread carefully and consider policy recalibrations, including tighter disclosure norms around ECB end use and hedging disclosure norms, more rigorous monitoring of sectoral exposures, and a determined push to deepen India’s corporate bond market. Without these measures, the Indian financial system may become increasingly vulnerable to external shocks, and the economy may suffer as a result. Ultimately, it is essential to strike a balance between accessing foreign capital and developing domestic credit markets to ensure the long-term stability and growth of the Indian economy.
