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RBI likely to cut export finance rates

The Reserve Bank of India is widely expected to lower interest rates for exporters to boost slowing overseas sales when it unveils its annual monetary policy on Thursday.

Exporters say their current cost of funds is too high and needs to be brought down if they are to compete globally and they are taking heart from RBI Governor Bimal Jalan's statements last week that the rates could be cut.

He told reporters last week that the RBI was considering restoring export refinance limits, cut last year, and was also looking at the possibility of a reduction in export finance rates.

If that happens, exporters will certainly be pleased.

Since the RBI cut the key bank rate earlier this year, they have been clamouring for a corresponding reduction in the administered interest rates on export finance.

"At current rates export finance is not really concessional," said J Shankar, treasurer of technology firm Wipro Ltd. Funds are available at 10 per cent through commercial paper, short-term loans or foreign currency loans.

Wipro, whose exports exceeded $270 million in the nine months to December, being cash-rich, does not use export finance.

For the past 18 months, exporters have been getting rupee loans up to six months at 10 per cent and longer tenors at 12-13 per cent, besides LIBOR-linked foreign currency loans.

That may be cheaper than the 11.50-12.00 per cent short term rates that state-run banks charge top-rated customers but exporters say it is still high to allow them to compete globally.

Analysts say a boost is needed to help exports, which grew 20 per cent to $39.5 billion in April-February -- but showed only 10 per cent year-on-year growth in February.

Exports form just one-tenth of GDP. But, with a perpetual trade deficit and high dependence on global markets for its oil needs, India has for years followed a policy of encouraging exports through concessional finance, tax breaks and other incentives.

No cuts in Bank Rate

Governor Jalan has said the policy announcement will include no cuts in the bank rate or in the eight per cent cash reserve ratio.

Elsewhere in the economy, agricultural output is almost flat, industrial growth is slow and even software exports may be hit by the high dependence on the sluggish US economy.

The stock market is in the doldrums after scandals and earnings warnings while the rupee is hitting new lows.

That has raised doubts about the sustainability of foreign investment, which has been a big positive so far and a likely balancing factor against an estimated $17 billion trade deficit.

Besides direct investments, portfolio flows in excess of $1.8 billion have been received so far in 2001 and have driven foreign exchange reserves to a record high of $42.689 billion.

Foot the bill

Under current central bank rules, banks have to ensure at least 12 per cent of their advances fund exports, and the RBI now reimburses only 50 per cent of such lending at eight per cent.

Banks, bearing the brunt of the subsidy, are seething over the RBI's decision last July to halve their refinance limits against export loans as a rupee defence measure.

"If the government wants to give a fillip to exports, why should I bear the subsidy?" said a European bank's treasurer.

Jalan last week raised hopes that export refinance limits too will be restored, which would effectively translate into a nearly one percentage point cut in the CRR, although it goes against the longer term objective of phasing out all sector-specific refinance.

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