India's ECB inflows expected to rise in FY27 amid RBI support, offsetting CAD pressures: Report

NEW DELHI: External commercial borrowing (ECB) inflows are expected to recover in FY27, supported by RBI measures to attract foreign capital, according to a Bank of Baroda (BoB) report.

External commercial borrowings (ECBs) serve as an additional source of financing for domestic companies. Over the years, ECB trends have been influenced by a number of factors such as the availability of domestic funding, demand for capital, global interest rates, and movements in the exchange rate.

According to the BoB report, India's ECB registrations (including FCCBs) declined to USD 42.9 billion in FY26 from USD 61.2 billion in FY25 due to sharp Rupee depreciation, which further led to higher hedging costs and narrowing rate differentials with the US, as per the report.

Currency volatility, specifically the rapid decline in the value of the domestic exchange rate, was an important factor, as per the report. "In FY26, INR depreciated by 4.3% based on the yearly average, compared with a decline of 2.1% in FY25," it said. Additionally, the decline was much sharper at 9.9 per cent this year, compared with 2.4 per cent in FY25.

It further noted, a key factor behind the decline in ECB registrations in FY26 was lower overseas borrowing by NBFCs, which remained the largest borrowers in the market. ECB borrowings by NBFCs fell to USD 16.8 billion from USD 27.3 billion a year ago, largely driving the overall decline in ECB registrations. The report further noted ECB registrations by NBFCs totalled "USD 16.8 billion in FY26, as against USD 27.3 billion in FY25" in absolute terms, "which largely explains the decline in total ECB registrations".

Additionally, "ECB registrations by the manufacturing sector almost halved to USD 7.3bn in FY26 compared with USD 13.9bn in FY25."

The report further noted in FY26, the spread between Indian and US interest rates narrowed to about 150 bps, much lower than the historical average of about 300-400 bps.

RBI's dollar-rupee swap facility for PSU borrowers is expected to boost ECB inflows by mitigating currency risk and lowering hedging costs, especially as PSUs--already accounting for 15-20 per cent of ECB registrations--offer significant untapped potential for future borrowings, as per Bank of Baroda.

Overall, ECB inflows are expected to increase in FY27. "This along with other measures by the RBI to attract foreign inflows should help offset the widening current account deficit, leading to a net accretion of foreign exchange reserves in FY27," the report added.