Module: | MODULE A: INTERNATIONAL BANKING
Q201: Consider the following statements regarding the fundamental structure of External Commercial Borrowings in India:
1. External Commercial Borrowings are commercial loans raised by eligible resident entities from recognized non-resident entities.
2. The regulatory framework classifies the raising of these funds into two distinct tracks known as the Automatic Route and the Approval Route.
3. The framework strictly prohibits the issuance of Indian Rupee denominated bonds, commonly known as Masala Bonds, to overseas investors.
Which of the statements given above is or are correct?
2. The regulatory framework classifies the raising of these funds into two distinct tracks known as the Automatic Route and the Approval Route.
3. The framework strictly prohibits the issuance of Indian Rupee denominated bonds, commonly known as Masala Bonds, to overseas investors.
Which of the statements given above is or are correct?
✅ Correct Answer: A
🎯 Quick Answer:
Option A is correct because only statements 1 and 2 are accurate.Structural Breakdown: The central bank structures this borrowing mechanism into the Automatic Route, where borrowers do not need prior approval if they meet specific financial parameters, and the Approval Route, which requires explicit permission from the Reserve Bank of India.
Statement 3 is entirely incorrect because the framework explicitly includes Indian Rupee denominated External Commercial Borrowings, widely referred to as Masala Bonds, which shift the currency risk from the Indian borrower to the foreign investor.
Historical Context: The framework has evolved significantly from strict micro-management in the 1990s to a broad macro-prudential limit system today, aiming to provide cheaper global capital to domestic industries while preventing unsustainable national foreign debt levels.
Causal Reasoning: The causal logic for permitting Indian Rupee denominated offshore bonds is to protect the domestic economy from systemic shocks.
If the Indian Rupee depreciates sharply, companies with foreign currency debt face massive repayment burdens.
Rupee denominated bonds eliminate this specific exchange rate risk for the domestic borrower.