Liberalization move: RBI’s overhaul of its rules for borrowing from abroad opens up greater access to global capital

Over the decades, commercial loans raised by Indian resident entities have been regulated under tightly-controlled regimes, with caps on the quantum of annual borrowing, ceilings on interest spreads, prescriptive maturity conditions and rigid end-use norms.

The new framework, which raises borrowing limits and removes the all-in cost ceiling, represents a structural shift towards a calibrated and market-driven approach.

ECBs are an important source of funding for Indian corporates. According to RBI data, outstanding ECBs stood at $190.4 billion as of September 2024, marginally higher than in June and March 2024.

Of this, about $155 billion comprised non-rupee and non-foreign direct investment-related components. The private sector accounted for roughly 63% of outstanding ECBs (amounting to about $97.6 billion), with public sector entities making up the remaining 37% (about $55.5 billion).

Insofar as new ECB registrations are concerned, these rose sharply to $49.2 billion in 2023-24 from $26.6 billion in 2022-23, even though these still stood slightly below the $52.9 billion recorded in 2019-20 during the era of ultra-low global interest rates. In 2024-25 (up to November 2024), ECB registrations had already reached $33.8 billion.

Despite the increase in absolute flows, ECB and foreign currency convertible bond registrations as a share of gross domestic product (GDP) have declined—from 1.9% in 2019-20 to about 1.2% in 2023-24. Similarly, outstanding ECBs as a percentage of GDP have moderated from 5.7% to 4.9% over the same period.

The divergence between India’s rising nominal stock and falling relative burden indicates that our economy has outgrown its need for external commercial borrowings. Against this context, the central bank’s decision to liberalize the ECB framework was imperative.

To understand the broader picture, our ECBs must be placed in the context of total external debt. As of the end of December 2024, according to RBI data, India’s total external debt stood at $717.9 billion, while outstanding ECBs were about $190.4 billion, implying a share of around 26%.

The remainder includes sovereign borrowings, multilateral and bilateral loans, deposits from non-resident Indians, trade credit and other liabilities. Against this macroeconomic backdrop, RBI’s ECB reform appears less like an aggressive gamble and more like a confident recalibration.

The revised framework raises the borrowing limit to $1 billion or 300% of a borrower’s net worth, whichever of the two is higher. This links a company’s ECB capacity to its balance-sheet strength, which is better than having a fixed ceiling for all borrowers. It marks a momentous departure from the earlier provision, under which firms could raise only up to $750 million annually under the automatic route, often constraining large capital-intensive projects and necessitating additional approvals for foreign debt.

Equally significant is the removal of the all-in-cost ceiling. Previously, ECB interest rates were capped relative to benchmark rates. But loan pricing can now align with market conditions, signalling greater regulatory maturity.

These reforms clearly enhance allocative efficiency. The easing of access to global capital markets that they enable can reduce financing costs, diversify funding sources and support long-gestation infrastructure projects.

However, it is important to recognize that this greater flexibility comes with higher underlying risks. Foreign currency borrowing inevitably exposes firms to exchange-rate volatility. A sharp depreciation of the rupee can materially increase debt-servicing obligations in domestic currency terms. Similarly, a sudden tightening of global liquidity conditions could raise refinancing costs and strain the balance sheets of borrowers.

India, however, enters this phase with two key strengths.

First, its external debt burden has remained moderate and stable. External debt has hovered within a narrow 17-19% of GDP range between 2019-20 and 2024-25, even as its stock rose from about $560-610 billion in 2020–21 to over $730 billion by 2024-25. Nominal GDP growth has kept the ratio contained, and it remains lower than in many comparable emerging markets.

Second, risk management has improved. RBI data shows that around two-thirds of outstanding ECBs were hedged as of September 2024, up from roughly 55% two years earlier. This has provided a stronger buffer against exchange-rate volatility.

India’s ECB reform is, therefore, a recognition that a $4 trillion economy cannot operate indefinitely under rules crafted for a much smaller system. It reflects confidence in India’s macro fundamentals, foreign exchange buffers and regulatory capacity.

The author is professor, Madras School of Economics.