Ban on ECBs by Indian Real Estate Companies may be Withdrawn

The Reserve Bank of India (RBI)’s ban on External Commercial Borrowings (ECBs) may be revoked once its inflation control efforts begin to show results.
The RBI is following a wait and watch policy on inflation levels and interest rates, and the mid-term review in July could possibly see a reversal of the ban on ECBs.

Before the ban, real estate companies were permitted to raise funds through
ECBs provided the funds were used for integrated townships at least 100
acres in size.

Based on the data on ECBs which would be available only by the
end of next month, a decision to allow external borrowings by
real estate companies would be taken.

The Government had hastened to restrict
borrowings following the surge in ECB inflows, crossing USD 9
billion between April and December, 2006

The free flow of capital triggers inflation, and the surging
rupee does not help matters for the RBI.

A temporary restriction
on forex inflows was therefore necessary to keep a check on money
supply into the market
Inflation finally dipped to 5.06% on May 19, after an almost
9 month run of over 6%.A further fall in inflation to below 5%
levels, maintained over a period of 4 to 5 weeks would ease money
supply management for the RBI, and fresh ECBs could be considered.

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