Tap forex pool to help exporters: Ministry
The Commerce Ministry has asked RBI to use a part of its foreign exchange reserves to give long-term loans at low interest rate to the Exim Bank of India, which can pass it on to exporters at lower rates than bank credit.
Why?
The aim is to help reduce the costs and enhance the competitiveness of exporters at a time of global trade slowdown and weak demand overseas.
Commerce Ministry’s proposal:
According to the commerce ministry, a part of India’s foreign exchange (forex) reserve can be used for loans as the forex reserve has now increased to a record high of around $360 billion.
- The ministry argues that higher import cover indicates greater currency stability and India’s capacity to absorb external shocks, such as the impact of an outflow of funds following a rate hike by the US Fed, and support its domestic economy.
What necessitates this?
Rate of export credit in India is between 11 and 12% as against 2-3% in the Euro area (except Greece), 2.6% in Taiwan, 4.6% in Thailand, 5.5% in China and 6.2% in Malaysia.
- Exporters, citing the contraction in the country’s goods exports for 15 months since December 2014, have been demanding credit at lower rates to help increase their competitiveness in global markets.
- Exim Bank of India has also been citing constraints including that it is permitted a low leverage ratio, of around 11 times the bank’s net-owned funds, in comparison to that of its Chinese counterpart, where the ratio is 77 times. Exim Bank has sought relaxation of norms including a higher leverage ratio, of at least 15 times its NOF, and more capital from the government.
- However, the Finance Ministry is unwilling to give more capital to the Exim Bank given the fiscal constraints. Therefore, the Exim Bank is finding it difficult to finance project exports due to these operational limitations.
