Mumbai, Oct. 23: The Reserve Bank of India (RBI) may deregulate the interest rate on export credit in domestic currency and bring down the ceiling rate on it in foreign currency, in the forthcoming monetary and credit policy.
While the central bank has been consistently extending the benefits of a lower interest rate regime to exporters by reducing the ceiling rates on export credit over the past year, come October 29, RBI governor Bimal Jalan could well unshackle the controls on credit in domestic currency, a hint he had dropped earlier this year. Exporters say this may bring down costs incurred in raising export credit by at least 1 per cent.
Currently, domestic interest rates on export credit are linked to a bank’s prime lending rate (PLR). In September last year, the central bank had lowered the ceiling on export credit to 2.5 percentage points below the PLR till March 31, 2002. Though the ceiling rates were to revert to 1.5 percentage points from April 1, it subsequently extended the period during which the 2.5 percentage point interest rate would be applicable, to September 30.
While this concession entailed that the ceiling rate on pre-shipment rupee export credit up to 180 days would be 7.5 per cent to 8.5 per cent for most public sector banks, the effective interest cost to exporters was pegged at around 3 per cent.
Exporters now feel that it is time the RBI did away with this control on export credit in domestic currency. “The interest rates on pre and post-shipment credit is now in the region of 7-10 per cent based on the PLR of various banks. If the restriction on linking the interest rate to PLR is done away with, we could not only see more competition among banks, but interest rates also coming down further,” Ramu Deora, a city-based exporter and past-president of the FIEO said.
In fact, exporters like Deora have much to be optimistic this time, going by Jalan’s statements earlier this year in the lean season monetary policy. On that occasion, the RBI governor said that following a reduction in interest rates on foreign currency loans to exporters, linking domestic interest rates on export credit to PLR had become “redundant” as the effective interest rates are substantially lower than the PLR.
Bankers also feel that the central bank could bring down the ceiling rate on export credit in foreign currency to LIBOR plus 0.50 percentage point from the present LIBOR plus 0.75 percentage point. Earlier, such credit was available at LIBOR plus 1 percentage point.