Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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.

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