Agreements for external commercial borrowings (ECBs) signed by Corporate India rose to $29.8 billion during April-October this fiscal year, as compared to $12.4 billion during the year-ago period, data from the RBI’s December bulletin show. That was a jump of over 140%.
Disbursements or inflows too rose in a similar fashion in the period – these were $21.8 billion in the first ten months of the current fiscal year, up 77% on year (see chart).
The easing of ECB rules by the Reserve Bank of India in June last year also prompted many Indian companies to tap the overseas market for capital.
A section of Corporate India apparently finds EVN attractive, even after taking into account the cost of hedging against exchange rate volatility. Many firms are using a combination of domestic bank funds, the local bond markets, and ECBs of certain tenures to boost their capex.
Significantly, nearly three-fourths of the new ECBs registrations during April-October 2023 were earmarked for capital expenditure and the rest was raised for refinancing of earlier ECBs/rupee loans, working capital and other purposes, the RBI bulletin revealed.
While the government has been vocal about the strong, sustained credit growth, high capacity utilisation levels in the industry, and low leverage ratio among companies in many sectors, all high frequency indicators haven’t supported a full-fledged recovery in private investments until lately.
ECB registrations had fallen by a third to nearly $27 billion during 2022-23, as global interest rates hardened significantly. The latest spurt in the use of the ECB route for project financing is despite the interest rates abroad being still elevated.
The rush for ECBs must also been seen in the context of the Federal Reserve’s dovish tone in the latest policy review and heightened expectations of the US central bank starting to cut interest rates in 2024.
The RBI had in July 2022 doubled the ECB limit for individual borrowers under the automatic route to $1.5 billion or equivalent, and raised the all-in-cost ceilings for both foreign-currency and rupee-denominated borrowings, subject to investment grade rating.
The RBI pegs India’s real GDP growth for the current fiscal at 7%, as against 6.3% forecast by the International Monetary Fund. In Q2FY24, the economy grew by a robust 7.6%, beating all estimates by a wide margin. A big push from manufacturing and investment segments pushed the growth rate up in the quarter.
Citing the 11% year-on-year jump in gross fixed capital formation (GFCF) in the September quarter, chief economic adviser Anant Nageswaran said that the private sector is poised to attain stronger investment growth, following the strengthening of corporate and bank balance sheets, and supported by the government’s capex push.
In Q1 FY24 and Q4 FY23, the GFCF had grown 8% and 8.9%, respectively. The component’s share in the GDP in Q2FY24 was at 35.3%, although similar to Q4 FY23, was the highest in 47 quarters. With the government sustaining push towards capex, the GFCF’s growth is expected to stay elevated in the coming quarters. In the current quater, a low base effect will also aid to GFCF growth.
The industry has also confirmed a pick-up in investments. Confederation of Indian Industry president R Dinesh told FE recently that the 11% GFCF growth in the second quarter of the current fiscal year would not have been feasible without significant private sector capex. “For three continuous quarters, we have had between 75% to 95% capacity utilisation (across industries). This is not just in three-four sectors, it has happened literally in every sector,” he said.
Majority of CII members in a survey said that in H2FY24 private-sector investment is going to be higher than the H1, he noted.