In recent years, keeping in view the need for capital inflows as well as the investment needs, particularly for those in the infrastructure sector and those having forex earning capabilities to service ECBs, we have relaxed the regulatory framework for ECB in several respects. 14. In this context, let us examine the motivation for firms resorting to ECB.
If a firm has a foreign currency revenue stream it is optimal for it to borrow in foreign currency as well so that its balance sheet does not carry any currency risk. But if its revenue is all in Rupees, it ought to fully hedge its foreign currency liability and a fully hedged ECB should offer no arbitrage in ideal market conditions.