External Commercial Borrowings

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Context

• Registrations by Indian companies for External Commercial Borrowings (ECBs) surged to $49.2 billion in FY24 from $26.6 billion in FY23, based on Reserve Bank of India (RBI) data.
• Net inflow reached $9.5 billion in FY24, showing improvement compared to less than $1 billion in FY23. However, the overall cost of ECB loans rose due to elevated global benchmark interest rates.

READ ALL ABOUT EXTERNAL COMMERCIAL BORROWINGS: https://www.iasgyan.in/daily-current-affairs/external-commercial-borrowings-ecb-16

Trends in ECBs:

• ECB disbursements totalled $38.4 billion in FY24, a significant increase from $23.8 billion in FY23.
• Indian companies, particularly highly rated general and finance firms, turned to overseas markets for funding at reasonable rates compared to the domestic market.
• The trend of raising funds through ECBs is expected to continue in FY25, especially with the anticipated growth in the capital expenditure cycle, contingent upon market conditions.

Hedging and Risk Management:

• More than 70% of ECBs raised in FY24 were effectively hedged, either through explicit hedging, rupee denominated loans, or loans from foreign parents.
• This hedging strategy helped limit the impact of external shocks on Indian companies, providing stability amidst fluctuating global financial conditions.

End Use of ECBs:

• Although diverse, the primary areas of fund utilization in FY24 were capital goods sourcing, modernization, and infrastructure development.
• This allocation of funds suggests a positive outlook for capacity augmentation in the economy, indicating growing private sector investment demand.

Cost Dynamics:

• The overall cost of ECB loans increased in FY24, attributed to elevated global benchmark interest rates like the secured overnight financing rate.
• Between March 2022 and March 2023, the overall cost of ECB loans surged by 516 basis points due to tightening global financial conditions and the rise in international reference benchmark rates.

READ ALL ABOUT EXTERNAL COMMERCIAL BORROWINGS: https://www.iasgyan.in/daily-current-affairs/external-commercial-borrowings-ecb-16

PRACTICE QUESTION Q. Discuss the role of External Commercial Borrowings (ECBs) in India's economy, highlighting benefits, risks, and regulatory measures for effective management.

SOURCE: BUSIINESS STANDARD