The government's fears on excessive inflows of foreign funds are not untenable. Debt raised by Indian companies via external commercial borrowings (ECBs) is now estimated to have totalled $24 billion in the previous fiscal.

This is close to 10 per cent higher than the government's internal cap of $22 billion, fixed for the previous fiscal. Given that the cap is not really enforceable since majority of the capital raised overseas comes through the automatic route, the ceiling only indicates the government's comfort level for foreign fund inflows in a particular year.

Though RBI has not officially released the figures yet, experts believe that gross foreign fund inflows through the ECB window in the last fiscal were at $24 billion. The central bank has, thus far, released figures for capital raised through ECBs up to February 2007.

According to these figures, about 812 companies have raised about $20.24 billion via ECBs in the April 2006-February 2007 period. In order to check excessive inflows, the government in mid-May closes the ECB window for the real estate sector while paring the cap on interest rates at which companies can raise loans abroad, thereby weeding out smaller players that are not capable of getting cheap credit as a result of low credit ratings.

One of the reasons for huge dollar inflows is that domestic interest rates have been on the rise. Consequently, the difference in rates at which Indian companies access credit locally and internationally is as high as 3-4 per cent, excluding the forward cover cost.

However, excessive dollar inflows exert pressure on the rupee by escalating the demand for rupees. In other words, dollars entering the market are absorbed by RBI which then releases rupees of the same amount into the system, which increases the money supply and thus haul up demand in the economy. This, in turn, has an inflationary impact.

Economists believe that Indian companies during the last year borrowed heavily through ECBs thereby leading to excessive dollar inflows which created problems for the central bank. Now by restricting ECBs for the real estate sector, the government is attempting to control money flows, especially by tightening fund flows into risky sectors.

According to a RBI bulletin in April 2007, the central bank bought $24.517 billion from April 2006 to February 2007. This is only an indicative figure of the amount of dollars mopped up by the central bank in the previous fiscal since some of the purchases are routed through public sector banks, for which, complete data is not available.