With a view to enhance credit flow to the export sector, the Reserve Bank recently enhanced the eligible limit of the Export Credit Refinance (ECR) for scheduled banks (excluding RRBs) from 15% of the outstanding export credit to 50%. As per RBI, this will provide additional liquidity support and some leeway to banks to borrow up Rs 30,000 crore. While some do not consider the measure a boost enough for liquidity, as it is not the availability of funds but the cost of funds which is the issue, others have welcomed the move suggesting, RBI has directionally given the money out for export refinance which will work as an incentive for dollars to come in, thereby strengthening the rupee.
As, majority market participants were expecting the apex bank to slash its key policy rates by 25 basis points as well as cut the cash reserve ratio, most sectoral indices slipped into the negative zone immediately after the announcement, led by banking and realty indices. RBI contends that while growth has moderated, inflation remains discomforting and it is factors other than the interest rates which are contributing to the growth slowdown. However, economists say that though inflation remains a concern, the slowing growth needed at least a 50-basis-point rate cut.
Indeed, the sharp decline in India’s economy in the recent past can be attributed to a combination of factors including high borrowing costs, government inaction on key policies and sluggish global environment. The RBI seem to have taken a cautious stance, waiting for some more data points on inflation and growth to decide which of the two constitutes is a more serious threat. At present, it feels that inflation pressures remain too strong to ease policy further and in terms of fiscal adjustment too steps are yet to be taken by the government.
The RBI clearly surprised the market by not cutting either Cash Reserve Ratio (CRR) or the repo rates but it is willing to provide more liquidity comfort to banks. The increase of ECR limit will be an additional injection of liquidity amounting to 300 billion rupees ($5.4 billion) or approximately 50 bps of CRR cut. The RBI also maintains that management of liquidity remains priority and it will continue to use OMOs (open market operations) as and when warranted to contain pressures.