SHASH2K2
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Corporates have been urging the government to ease the norms on external commercial borrowings (ECBs) as interest rates in the domestic economy are hardening, following RBI's continuous tightening of monetary policy. One of the demands is to allow Indian companies to borrow in Chinese currency.
This suggestion is now part of the recently-announced ECB policy. The decision, which is welcome, comes at a time when China's largest bank, the Industrial and Commercial Bank of China, has opened its first branch in India. This is perhaps a coincidence, but nevertheless significant.
The move to add the yuan to the list of currencies - dollar, euro, pound and yen - in which Indian companies can borrow will help firms save on transaction costs involved in currency exchange. What would, otherwise, have been a two-stage process - raise yuan resources, convert to dollars, and then to rupees - will now be direct.
While this is a huge positive, one has to remember that managing currency risks related to the yuan's movement would not be as flexible as is for other currencies. This is because the yuan is not fully convertible.
So, Indian companies raising yuan resources will have to tread carefully in practicing currency management. A mechanism for hedging currency risk for the yuan will be needed to make borrowing in yuan a success. Going forward, with increasing global pressure on China to abandon its fixed currency regime, Indian companies should also watch out for the stability of the yuan.
Corporates can borrow up to an equivalent of $1 billion in Chinese currency. This is a good beginning but, going ahead, this limit will have to be increased. India is among China's top 10 trading partners and, today, we import goods worth billions of dollars from China. Even if a fraction of these imports is to be financed using credit lines from Chinese banks, then the present limit is certainly on the lower side.
Finally, while this move will benefit most companies in the infrastructure sector, especially power, we must take steps to strengthen our domestic capital goods industry. These companies must be offered a level playing field as competition from Chinese firms is likely to increase now.
Will Yuan borrowing help Indian companies - Economic Times
This suggestion is now part of the recently-announced ECB policy. The decision, which is welcome, comes at a time when China's largest bank, the Industrial and Commercial Bank of China, has opened its first branch in India. This is perhaps a coincidence, but nevertheless significant.
The move to add the yuan to the list of currencies - dollar, euro, pound and yen - in which Indian companies can borrow will help firms save on transaction costs involved in currency exchange. What would, otherwise, have been a two-stage process - raise yuan resources, convert to dollars, and then to rupees - will now be direct.
While this is a huge positive, one has to remember that managing currency risks related to the yuan's movement would not be as flexible as is for other currencies. This is because the yuan is not fully convertible.
So, Indian companies raising yuan resources will have to tread carefully in practicing currency management. A mechanism for hedging currency risk for the yuan will be needed to make borrowing in yuan a success. Going forward, with increasing global pressure on China to abandon its fixed currency regime, Indian companies should also watch out for the stability of the yuan.
Corporates can borrow up to an equivalent of $1 billion in Chinese currency. This is a good beginning but, going ahead, this limit will have to be increased. India is among China's top 10 trading partners and, today, we import goods worth billions of dollars from China. Even if a fraction of these imports is to be financed using credit lines from Chinese banks, then the present limit is certainly on the lower side.
Finally, while this move will benefit most companies in the infrastructure sector, especially power, we must take steps to strengthen our domestic capital goods industry. These companies must be offered a level playing field as competition from Chinese firms is likely to increase now.
Will Yuan borrowing help Indian companies - Economic Times
