Source: BS
Context:
The net inflows of foreign resources via External Commercial Borrowings (ECBs) rose to $4.6 billion in April-June period of the financial year 2025-26 (Q1FY26) from $ 2.8 billion in the same period previous year, the Reserve Bank of India data showed.
What are ECBs?
- Loans raised by Indian corporates from foreign lenders in foreign currency, regulated under FEMA, 1999.
- Sources include international banks, multilateral institutions, export credit agencies, and global bond markets.
RBI’s Role in Managing ECBs
The Reserve Bank of India (RBI) is the main regulator of ECBs. Its role includes:
- Policy Framework under FEMA, 1999
- Issues ECB Master Directions.
- Decides which sectors, borrowers, and lenders are eligible.
- Approval Mechanism
- Automatic Route: Within prescribed limits, no prior RBI approval needed.
- Approval Route: Sensitive sectors/large amounts require RBI clearance.
- Monitoring End-Use
- Restricts ECBs for speculative activities like real estate, land purchase, or stock market investment.
- Allows ECBs for infrastructure, manufacturing, innovation, and green projects.
- Hedging & Risk Management
- Mandates hedging for certain categories of borrowers to reduce currency risk.
- Cost & Tenor Regulations
- Prescribes all-in-cost ceilings (interest + fees) linked to international benchmarks (SOFR, etc.).
- Sets minimum maturity periods for short-term vs. long-term borrowings.
- Reporting & Transparency
- Borrowers must file ECB returns (Form ECB-2) to RBI for monitoring.
- RBI tracks inflows, repayments, and outstanding foreign debt.
- Macro-Prudential Regulation
- RBI uses ECB caps and conditions as tools to manage external sector stability, capital flows, and rupee volatility.
Impact of ECB Inflows
- Net inflows rose to $4.6 billion in Apr–Jun 2025 vs $2.8 billion in Q1FY25.
- Shows strong corporate demand for global capital.
Implications
- Boosts investment and industrial growth.
- Strengthens forex reserves temporarily.
- Raises India’s exposure to global interest rate cycles and currency risks.
- Heavy reliance may worsen external debt sustainability if rupee depreciates.
Acts & Provisions (Important for RBI Exam)
- Foreign Exchange Management Act (FEMA), 1999 – Legal basis for ECB regulation.
- RBI Act, 1934 – Empowers RBI to regulate external borrowings and foreign exchange.
- Companies Act, 2013 – Governs corporate borrowing and disclosure norms.
