RBI Rate Hike To Further Dampen Exporters’ Fate.

The 50-basis points hike in rates by the Reserve Bank of India (RBI) is seen as a further dampener for exporters that are already witnessing decline in rupee-dominated credit off-take after 10 rounds of hike since March 2010.

According to Federation of Indian Exports Organisation (Fieo), share of exports in net banking credit is continuously on decline and stand at a low of 4 per cent as against the desirable target of 12 per cent. This comes on the back of 71 per cent increase in cost of credit in last 16 months for exporters at 12 per cent now, including the Tuesday’s hike of 50 basis points.

“Given the slowdown in advanced economies, exports must now be included in priority sector lending window and at-least half of 40 per cent adjusted bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher, may be allocated to the sector,” Ramu Deora, president of Fieo said.

Most affected sectors will be leather, carpets, textiles and auto components owing to their long manufacturing cycle. Also, these sectors have large number of small and medium enterprises and the dollar-denominated credit is rarely available to these players. On the contrary, their peers in the US are availing credit at less than one per cent; the EU below 3 per cent while it is available at little over 6 per cent in China.

The impact is two-fold. The dollar-denominated credit provides for natural hedging against currency fluctuations. Since this is not readily available to Indian SMEs due to absence of a guarantee, their exports are subject to volatility in dollar and euro and this in turn reduces margins further.

TCA Ranganathan, chairman and managing director of Exim Bank of India, feels that the latest rate hike will further affect future investments in India. “Interest rate hikes always had an impact on exports and this will lead to further slowdown in investments in the sector, more so because subsidised financing is no longer available to exporters,” Ranganathan pointed out.

The impact of rate hike is likely to be reflected in short term on exports that showed 45.7 per cent growth in April-June 2011 at $ 79 billion. Going forward, even the commerce ministry is apprehensive if the industry would be able to register export growth beyond 20 per cent due to renewed signs of weakness in US economy, widespread debt crisis in Euro-zone barring France and Germany.

“Our margins have contracted by four per cent in last one year and this is largely due to increasing interest rates and high commodity prices. If the trend continues, we will be barely competitive in the US and EU markets against our Thailand, Vietnam and Bangladesh competitors,” textile exporter Subhash Mittal of Payal International added.

Source : mydigitalfc.com