WITH an eye on capital flows into the country, the Reserve Bank of India

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(RBI) on Wednesday withdrew the special facility that allowed non-deposit taking non-banking finance companies (NBFCs) and housing finance companies (HFCs) to take short-term foreign currency loans. Bankers, however, say that it cannot be directly inferred that the central bank is putting a cap on dollar inflows. But the central bank is certainly concerned that excess foreign funds could create an asset bubble in sensitive sectors like real estate.

The move may not have a big impact on companies which have already availed of the facility. HDFC, for example, borrowed $150 million through this window.

“We will not be impacted as foreign currency borrowing is less than 3 per cent of our balance sheet. It is part of RBI’s move to withdraw the special facilities that was introduced so that companies could tide over the credit crunch,” said a senior HDFC official

RBI also feels that there is enough liquidity in the domestic market to take care of the needs of these companies.

Banks on Wednesday parked Rs 1,17,170 crore of excess funds with the RBI at an interest rate of just 3.25 per cent.

“The decision has been taken after a review of the prevailing macroeconomic conditions and improvements in the domestic credit and liquidity conditions,” an RBI release said.

“But we do not think that the capital flows is a big problem so these are not steps towards controlling flows into the country. The equity markets are a bit unstable already so there is no immediate need for the central bank to curb flows,” said Ananth Narayanan, managing director, head rates, FX & credit, South Asia at Standard Chartered Bank. According to him, this is nothing but withdrawal of the temporary facility extended during the economic slowdown.

“RBI is concerned over the possibility of an asset price bubble building up,” according to a senior public sector banker.

RBI had allowed NBFCs on October 31, 2008, and housing finance companies on November 17, 2008, to raise short-term foreign currency borrowings not exceeding 50 per cent of the net owned funds (NOF) or $10 million, whichever was higher, for refinancing short-term liabilities. The facility was extended to these companies under the approval route, subject to certain terms and conditions. Net owned funds include capital and reserves of a company.