Mumbai: Contrary to the Reserve Bank's claim that increasing the export credit refinance (ECR) limit to 50 percent from 15 percent will infuse more funds into the system to the tune of over Rs 30,000 crore, experts believe that the move will have little impact on the liquidity scenario.
However, the measure is likely to bring down the widening trade deficit, which will help in bridging the current account deficit by encouraging exports, various industry experts said.
"This step is not a generic step. This is limited to exporters, which will witness infusion of up to Rs 30,000 crore of additional liquidity into the system," Crisil chief economist D K Joshi said.
The RBI Monday enhanced the export credit refinance (ECR) limit to 50 percent of the outstanding rupee export credit for banks, from 15 percent, a move that will inject Rs 30,000 crore into the system.
"To further augment liquidity and encourage banks to increase credit flow to the export sector, the RBI has increased the limit of export credit finance from 15 percent of outstanding export credit of banks to 50 percent, which will potentially release additional liquidity of over Rs 30,000 crore, equivalent to 50 basis points (0.5 percent) reduction in the cash reserve ratio or CRR," the central bank said in its mid-quarter policy review this morning.
Currently, banks are borrowing around Rs 90,000 crore through the LAF corridor daily, which is above the RBI's comfort level of Rs 60,000 crore plus or minus.
Joshi, however, pointed out that this step will help become domestic exporters more competitive in the global markets.
The banks were expecting RBI to reduce the CRR by 0.25 percent to bring down cost of funds, which will prompt them to reduce lending rates. However, Rs 30,000 crore additional liquidity, which is equivalent to 50 bps cut in CRR, will not lower the cost of funds for banks, another economist said.
"These two things can't be equated. One is additional liquidity addition and another is reduction in cost of funds. I think, cost of funds of banks will not be lowered due to this (export credit) step," Deloitte India senior director Anis Chakravarty said.
He, however, said the step will reduce the current account deficit by encouraging exports.
On the back of slowing domestic and global economic growth, current account deficit has been close to 4 percent of GDP last fiscal, while fiscal deficit rose to 5.7 percent.
On this, SBI economist Brinda Jagirdar said there will be easing of liquidity in the system due to this step.
"This will be definitely ease liquidity situation. But, the impact will be limited to exporters only," she said.
Jagirdar, however, said unless cost of borrowing go down, cost of funds will not cool off due to this step.
First Published: Monday, June 18, 2012, 21:02