Central bank dangles easier ECBs, but here’s why companies may not bite

The central bank earlier this month announced a major overhaul of the ECB norms, significantly raising the amount corporates can borrow, scrapping cost caps on ECB rates, and easing restrictions on how the funds can be used. The new draft framework aims to simplify accessing the overseas market, proposing measures like higher per-tranche limits and greater currency flexibility, including the conversion of rupee bonds to foreign currency and vice versa. ECBs are essentially foreign-currency or rupee-denominated loans raised from non-resident lenders.

“I don’t think borrowers were getting choked by the earlier limits. But the RBI likely eased caps to prevent any bottleneck if credit demand rises in the coming quarters,” said a senior official at a global investment bank.

The regulatory moves come amid a broader ‘wait-and-watch’ stance across markets due to global rate uncertainty, he said, adding that if festive demand boosts credit growth, ECBs will avert funding stress in the fourth quarter, given that domestic liquidity has tightened. “No one’s rushing in yet, but it’s about timing, demand and pricing,” he said on the condition of anonymity.

Indian companies raised a total of $12.44 billion through ECBs till July of this financial year, compared with $14.68 billion in the corresponding period of the previous year, as per RBI data.

Some of the largest ECBs during this period were raised by Reliance Industries, Oil India, Indian Renewable Energy Development Agency and even micro finance companies such as Credit AccessGrameen.

The rupee weakened by about 3.7% against the dollar in the first half of FY26 owing to a strong dollar, rising crude oil prices, foreign portfolio outflows, and US tariffs on Indian goods. On Tuesday, the domestic currency was trading 21 paise lower at 88.40 against the US dollar, its lowest since 14 October, owing to month-end dollar demand from importers and a rise in global crude oil prices.

NBFC impact

Non-bank lenders are among the biggest categories to borrow overseas. The central bank has been encouraging NBFCs to raise funds via overseas bonds to diversify their borrowing profile and reduce dependence on banks and domestic markets.

However, ECBs by NBFCs are also seen muted in FY26 given the expectation of a pick-up in bank financing in the second half of the financial year, besides the higher hedging costs, according to industry experts.

“ECBs had done very well in FY25. Now, interest rates have largely gone down, and the rupee has depreciated 4-5% (this year) and so many corporates are now instead looking at domestic borrowings,” said Jinay Gala, head of research for non-bank financial institutions at India Ratings. Given that a lot of corporates borrowed from overseas last year, demand this year is likely to be lower, he added.

According to Gala, banks will also return to lending to NBFCs sometime this year. Given the attractive rates, he added, domestic fundraising via public debt issues and commercial paper will be preferred.

The biggest challenge is the steep hedging rates for borrowing abroad due to the rupee’s depreciation over the past year. On the other hand, domestic rates have only eased since February 2025 following the RBI’s cumulative 100 bps cut in the repo rate.

In August, Shriram Finance managing director and chief executive officer Y.S. Chakravarti said that as of now, outstanding ECB issuances are the most expensive component of the company’s cost of borrowing.

“The hedging cost is what is pushing the overall cost up. It would be 3.5-4% impact because we hedge for the full term of the borrowing, which is usually anywhere between 3-8 years,” Chakravarti said, adding that the Shriram Finance hedges 100% for the full term instead of doing partial hedges, which would be cheaper.

He attributed the increase in borrowings via ECBs in the last two financial years to the need to diversify the borrower base and given RBI’s mandate for NBFCs to route 20% of incremental borrowings through capital markets.

Market optimism

“Even now, the wholly landed cost of ECBs is still 60–70 basis points higher than comparable rupee borrowing. High hedging costs continue to make offshore debt relatively unattractive,” said a senior dealer at a large private sector bank. However, he is hopeful that RBI’s interventions in the foreign currency swap market might ease forward premiums.

“If RBI keeps bringing down forward rates and dollar bond yields soften, then the ECB market can pick up meaningfully,” he said, adding that reduced hedging costs will help make ECB issuances more viable.

What might also help is the emergence of new avenues for issuing ECBs such as the GIFT City in Gandhinagar and new markets such as Japan keen to increase investments in India.

“RBI’s move will encourage more issuances, especially from NBFCs and firms borrowing via GIFT City, where withholding tax benefits improve cost economics,” said Deepak Sood, partner and head of fixed income at Alpha Alternatives, adding ECBs have also picked up with Japanese banks lending aggressively to Indian corporates.

India Ratings’ Gala is optimistic that the ECB route will remain one of interest for financial companies given its flexibility in terms of the scale and tenure of capital, which he believes is reflected in the larger-ticket issues being done currently. “Right now, the growth is languishing. Once the growth picks up in the second half of FY26, I think ECBs can again see a comeback.”