RBI May Set Up A Corpus of LIBOR Linked Foreign Currency Loans.

In the wake of high interest rates and consequently lower credit offtake by exporters, the Federation of Indian Export Organisations (FIEO) wants the Reserve Bank of India to set up a corpus of LIBOR linked foreign currency loan and provide interest subvention to micro, small and medium enterprises (MSMEs) to ensure that export continues to grow.

“RBI may set up a corpus of LIBOR linked foreign currency loans as there is a dollar supply crunch in Europe. This, in turn, is pushing up the cost of obtaining the same through swap from other Asian markets, thereby impacting dollar loan requirements of MSME export sector in India,” Ramu Deora, president of FIEO said.

Dollar loans are hardly available to MSMEs in India because of absence of guarantee while it is easily available at 2.5-3 per cent in competing countries. This has hit the competing edge of Indian exporters, over and above 400 basis point hike in interest rates by RBI in the last one-year.

Currently, the cost of credit to Indian exporters has gone up from 7 per cent a year ago to over 11 per cent now. This is again far more than cost of borrowing in competing countries like China (6.5 per cent), Thailand (8.4 per cent), Indonesia (6.3 per cent), Mexico (5.1 per cent) and South Korea (1.25 per cent).

“With the global environment being subdued by a downgrade of the US, debt crisis in Europe and turmoil in the Middle East, interest rates for micro, small and medium enterprises in the export sector must be capped at 7 per cent with introduction of interest subvention for exports,” Deora added.

According to Deora, there is need for monitoring credit offtake by the exporters and the same should be reviewed regularly at all monetary policy reviews besides granting more funds to ECGC for covering troubled markets.

The concern of Indian exporters is despite 81.8 per cent jump in exports in July at $ 29.3 billion. During April-July 2011, exports went up by 54 per cent at $ 108.3 billion while imports grew by 40.4 per cent to $ 151 billion, resulting in balance of trade for the first four months of the current fiscal at $ 42.7 billion.

There are apprehensions within the commerce ministry that this kind of high growth is simply not sustainable. “Growth rates may start slipping either from August and definitely from September with sectors like textile facing the heat as they are dependent on US and EU. In fact, exports of $ 25 billion each month, if we achieve, will be good enough,” commerce secretary Rahul Khullar had said earlier.

Source : mydigitalfc.com