India’s decision to ban overseas borrowings by local real estate companies is aimed at curtailing debt flows as explained by the finance minister. According to him the idea behind is to slow down external debt in the real estate sector.

India last week banned real estate companies from raising funds overseas to develop townships, its latest measure aimed at limiting foreign-exchange inflows that has spurred the currency to a nine-year high, hurting exports. The measure is expected to help check capital inflows into the country and stem the gains in the currency, the fourth-best performer in the world this year after gaining 9% against the dollar. “The rise in rupee is worrying for exports and also for the manufacturing sector,” India’s trade minister Kamal Nath said on Monday in New Delhi. India’s central bank slowed dollar purchases after buying a record $11.8 billion in February on concern rupee funds injected from intervention will stoke inflation. A strong currency hurts textile and gem exporters. Exports make up 12% of India’s $854 billion economy. India’s inflation rate has stayed above the central bank’s target of about 5% since September last year. The rate slowed to 5.44% in the week ended May 5 after reaching a high of 6.69% in the first week of January. The currency rose 0.2% to 40.6763 against the dollar in Mumbai.

The government last week also capped the ceiling on costs of overseas loans by 50 basis points, or 0.5 percentage points. Interest payments, fees and expenses relating to securing an overseas loan with maturity of between three years and five years must not exceed 150 basis points above the London Interbank Offered rate
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  • I think the government gets into dilemma when it comes to the real estate sector. Over the past few weeks it has sought to systematically choke external fund flow to this sector. The budget restricted benefits of venture capital investments to nine sectors which many people think was aimed at the real estate sector.

    Earlier this month the finance ministry said that preference shares issued to foreign investors ought to be treated as debt. A few days ago the government removed integrated townships from the list of sectors eligible to garner funds through external commercial borrowings (ECB).

    The only long-term solution to the property bubble is to increase supply. If India is to urbanise at a rapid pace it needs flourishing real estate companies.
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