Mumbai: While relaxing norms to enhance credit flow to exporters, the Reserve Bank Monday said the sliding rupee will benefit exports that have been hit by demand slowdown in developed nations.
RBI increased the limit of the Export Credit Refinance (ECR) facility for banks from 15 percent of the outstanding export credit eligible for refinance to 50 percent.
"It will potentially release additionally liquidity of over Rs 300 billion (Rs 30,000 crore), equivalent to about 50 basis points reduction in the CRR," RBI said.
The RBI decision comes within days of the government announcing a slew of measures to boost exports that have been hit by global demand slowdown.
On the weakening of the rupee against the US dollar, the central bank said the domestic currency's depreciation over the past several months has helped domestic producers gain in competitiveness over foreign producers.
"Over time, this should result in expanding exports and contracting imports, thus acting as a demand stimulus," RBI said in its mid-quarterly review of the monetary policy.
The rupee has depreciated over 20 percent against the US dollar in the past one year.
Exports, however, have been hit due to demand slowdown in the developed markets and contracted by 4.17 percent in May.
The rate of interest charged on the ECR facility will continue to be the prevailing repo rate under the Liquidity Adjustment Facility (LAF), which is 8 percent.
The new limit will be effective from June 30.
M Rafeeque Ahmed, president of Federation of Indian Export Organisations (FIEO) said that "increase in refinance would provide necessary liquidity to MSME export sector".
He said the move would help banks to replenish the funds earmarked for the MSME export sector and ensure that funds are easily available to the sector in adequate measure.
Apparel Export Promotion Council complimented RBI Governor D Subbarao for enhancing the eligible limit of the ECR facility to 50 percent, up from 15 percent.
However, AEPERCENT Chairman A Sakthivel called for lowering interest rates, saying it would enable the industry to perform better.
"High interest rates are hurting the industry very much and that would be a step towards achieving the export target," he added.
Federation of Indian Export Organisations said the move to increase the ECR facility limit will help boost the country's exports.
"There will be additional liquidity for exporters which is a need of the hour as share of export credit in total credit which should be 12 percent has come down to close to 4.1 percent," said FIEO Director General Ajay Sahai.
The Reserve Bank's move to increase the export credit refinance (ECR) limit to 50 percent from 15 percent, which it claims would infuse more funds into the system to the tune of over Rs 30,000 crore, failed to win accolades from experts.
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 today 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.
At present, 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.
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, 12:27