No relief for exporters as RBI hikes key rates

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Bikky Khosla | 02 Nov, 2010
The mid-year review of RBI's credit policy saw a hike of 25 basis points in the repo and reverse repo rates, respectively while the cash reserve ratio (CRR) was left untouched at 6 percent. Though on expected lines to reign in inflation which has receded to single digit figure was still way above its comfortable level, businesses are likely to bear the brunt of this hike as lending rates are likely to move northwards. I feel, considering the current situation and today's move by RBI, exports are likely to face heat of hike in interest rate as well as an appreciating Rupee.

While it's understandable that RBI's move strikes the right balance between managing inflation and promoting growth, the increase in the reverse repo under LAF will also increase the rate of export credit for a second time this year - a major concern for exporters.

Meanwhile the strengthening rupee, which is up 9 percent against the dollar in the last 16 months has already taken its toll on several export sectors like textiles by making them more expensive in the global markets. Surprising though is the fact that unlike Brazil and some other countries, India instead of arresting this currency appreciation is willing to let the rupee rise.

Our think-tank seems to be far more eager for foreign investment despite longer-term threats of overheating the economy, which is considered as a side-effect of a strong rupee. While the high value exports like software and pharmaceuticals are more or less insulated from the damage caused by a stronger rupee, lower-value goods like clothes, handicrafts are most hard hit.

I strongly believe that the government should bring in policies that can force investors to invest in longer-term projects, which can check FII funds from flowing in and out of the country quickly. This will also slow the rise of the rupee and give exporters time to adapt to the rupee changes.