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Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026

February 16, 2026 4 min read Economics GS3
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What Happened

  • The Reserve Bank of India notified the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, significantly liberalising the External Commercial Borrowing (ECB) framework.
  • The individual borrowing limit under the automatic route has been raised from USD 750 million to USD 1 billion (or 300% of net worth, whichever is higher).
  • The RBI has removed the all-in-cost ceiling for ECBs, allowing borrowing costs to be determined by prevailing market conditions.
  • The eligible borrower base has been expanded to include any entity incorporated under Central or State Acts, and the recognised lender base now includes overseas branches of RBI-regulated entities and IFSC financial institutions.
  • On-lending of ECB funds to individuals is now permitted through RBI-regulated entities (except for real estate business).
  • The regulations were finalised after examining stakeholder feedback on the draft framework released on October 3, 2025, and apply prospectively.

Static Topic Bridges

External Commercial Borrowings (ECBs) Under FEMA

External Commercial Borrowings are commercial loans raised by eligible Indian entities from recognised non-resident lenders in foreign currency or Indian rupees. ECBs are regulated under the Foreign Exchange Management Act (FEMA), 1999, through the Master Direction on ECBs issued by the RBI. The ECB framework operates through two routes: the automatic route (no prior RBI approval needed if all parameters are met) and the approval route (requires prior RBI permission). ECBs are a significant channel for capital inflows, supplementing domestic credit and enabling Indian companies to access international capital markets at competitive rates.

  • FEMA, 1999 replaced the Foreign Exchange Regulation Act (FERA), 1973, shifting from a control-based to a management-based approach to foreign exchange.
  • ECBs can be raised as loans, bonds, floating/fixed rate notes, securitised instruments, and other forms specified by RBI.
  • Minimum Average Maturity Period (MAMP): Generally 3 years; 1-3 years for manufacturing companies (up to USD 150 million).
  • All ECBs must obtain a Loan Registration Number (LRN) from RBI before drawdown.
  • End-use restrictions: ECBs cannot be used for real estate (except affordable housing), investment in capital markets, on-lending for real estate, or repayment of non-performing assets.

Connection to this news: The First Amendment Regulations 2026 represent the most significant liberalisation of the ECB framework in recent years, raising limits, removing cost caps, and expanding both borrower and lender eligibility to attract greater foreign capital inflows.

Capital Account Convertibility and India's Approach

Capital account convertibility refers to the freedom to convert local currency into foreign currency and vice versa for capital transactions (investments, borrowings, and lending) without restrictions. India follows a calibrated approach to capital account liberalisation, allowing progressively greater freedom while retaining safeguards against volatile capital flows. The Tarapore Committee (1997 and 2006) recommended a phased approach to full capital account convertibility, contingent on fiscal consolidation, low inflation, and a strong financial system.

  • India achieved full current account convertibility in 1994 (under Article VIII of the IMF).
  • Capital account remains partially convertible, with different rules for FDI, FPI, ECBs, and NRI deposits.
  • Tarapore Committee I (1997): Recommended full convertibility by 1999-2000, deferred due to the Asian Financial Crisis.
  • Tarapore Committee II (2006): Recommended a three-phase roadmap ending 2010-11, partially implemented.
  • The "impossible trinity" (Mundell-Fleming trilemma) constrains simultaneous achievement of free capital flows, fixed exchange rates, and independent monetary policy.

Connection to this news: The liberalisation of ECB norms — raising limits, removing cost caps, expanding eligibility — represents a further step in India's calibrated approach to capital account opening, making it easier for Indian companies to access global debt markets while the RBI retains oversight through registration and reporting requirements.

Role of RBI in External Sector Management

The RBI manages India's external sector through regulation of foreign exchange transactions under FEMA, 1999, management of foreign exchange reserves, and oversight of capital flows including ECBs, FDI, and FPI. The RBI's approach balances the need for foreign capital to fund India's current account deficit with the imperative to maintain financial stability and prevent excessive external debt accumulation. India's foreign exchange reserves provide a buffer against external shocks.

  • India's foreign exchange reserves: approximately USD 630 billion (February 2026).
  • India's external debt: approximately USD 717 billion (September 2025).
  • The RBI uses multiple instruments: ECB regulations, FPI limits, Liberalised Remittance Scheme (LRS) limits (currently USD 250,000 per financial year), and NRI deposit scheme rules.
  • Authorised Dealer Category-I banks serve as the operational interface between borrowers and the RBI for ECB compliance.
  • The RBI publishes quarterly data on India's external debt and balance of payments.

Connection to this news: By liberalising ECB norms, the RBI is facilitating greater corporate access to international capital while maintaining regulatory oversight through mandatory LRN registration, reporting via AD Category-I banks, and retention of end-use restrictions.

Key Facts & Data

  • Previous automatic route ECB limit: USD 750 million per financial year.
  • New limit: USD 1 billion or 300% of net worth, whichever is higher.
  • All-in-cost ceiling: removed (now market-determined).
  • Minimum Average Maturity Period: 3 years (general); 1-3 years for manufacturing (up to USD 150 million).
  • Draft framework released: October 3, 2025.
  • Final regulations: Apply prospectively from date of notification.
  • On-lending to individuals: Now permitted (except real estate business).
  • Eligible borrowers: Any entity incorporated under Central or State Acts.
  • Recognised lenders expanded to include IFSC financial institutions.
  • FEMA, 1999 is the parent legislation (replaced FERA, 1973).