Regulating External Commercial Borrowings

Dr. Shankar Acharya and I participated in a discussion on the business news channel CNBC about the move by the Indian government to restrict external commercial borrowings. Both of us agreed that the ECB window was a very selective opening up of the capital account. My concern was that ECBs allowed the corporate sector to obtain cheap foreign debt while preventing individuals from tapping foreign markets to get cheap home loans. Dr. Acharya’s concern was that even within the corporate sector, the ECB window was being used largely by a handful of companies.

Both of us also agreed that in the long term, India needs a vibrant domestic financial system that is well integrated into the global capital markets. We disagreed about the timing and sequencing of these reforms. Dr. Acharya argued that the weaknesses of the domestic financial system (particularly the state owned banking system) need to be addressed first and that capital account opening must be gradual. My argument was that the best way to strengthen the domestic financial sector is to open it up to foreign competition and that we need to move rapidly on capital account convertibility.

Posted at 9:52 pm IST on Thu, 9 Aug 2007         permanent link

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