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June 11, 1998


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RBI announces new measures for export credit

The Reserve Bank of India announced new measures for export credit and allowed forward exchange cover for equity investment by foreign institutional investors for "incremental investments" with effect from tomorrow. This is apparently an effort to stem excessive speculative activity in the prevailing unusual market conditions.

RBI Governor Dr Bimal Jalan told the press that while the RBI would welcome an increase in FII investment, it would also like to ensure that those FIIs that wish to reduce their investments could do so easily at prevailing market rates. Banks and authorised dealers acting on behalf of these FIIs could approach the RBI and buy foreign exchange directly from it to reduce volatility in the foreign exchange market.

To support export growth, the RBI as a special case and a temporary measure, announced that the rupee interest rate charged by the banks to exporters on incremental exports over and above the base-year level of exports in 1997-98, would be only 6.5 per cent as against the present 11 per cent for pre-shipment credit for a period of six months and for post-shipment credit for a period of 90 days. This facility will be available for incremental exports up to December 31, 1999.

The provision of credit under the scheme will be refinanced by the RBI at four per cent per annum, similar to that of payable by the RBI on Cash Reserve Ratio balances.

To enable exporters access export credit in foreign currency more effectively at internationally competitive rates, banks would henceforth charge a spread of not more than 1.5 per cent over the London Interbank Offer Rate -- LIBOR. Banks have been advised to review their internal procedures so as to enable exporters to have access to such credit for entire volume of their exports. At present, banks are required to charge exporters a spread of not more than 2 to 2.5 per cent over LIBOR.

An RBI assessment of recent developments indicates that several factors have influenced higher of purchase activity. These include the recent uncertainty in international exchange markets, particularly the sharp depreciation of the yen in the previous week; the feeling that the east Asian crisis, which had shown signs of abatement, may actually be intensifying; the uncertainty regarding the immediate outlook for economic growth in India; and the possibility that spill-over effects from the international currency developments may further affect India's external position.

While it is not possible for any country to remain completely unaffected by developments in the international exchange markets, particularly of developments in important trading countries like east Asia and Japan, Jalan said in India the spill-over effects have been kept at a minimum through constant monitoring and timely action to prevent self-fulfilling speculative activities in the foreign exchange market.

In future also, the RBI is confident it can contain spill-over effects of adverse development abroad through a carefully calculated policy responses to the emerging situation.

Speaking about India's macro-economic conditions, he said that in the last three years, on an average, India has maintained a GDP growth rate of 6.6 per cent. It had also had an inflation rate of about 5.7 per cent, one of the lowest in the developing world, and a sustainable current account deficit of 1.4 per cent, he said.

During this period, external debt to GDP has also been reduced from 32.3 per cent in March 1995 to 23.8 per cent in September 1997. The debt service ratio has also been reduced from 26.2 per cent in 1994-95 to an estimated 18.3 per cent in 1997-98.

So far as prospects of growth in 1998-99 were concerned, the governor expects a normal monsoon promises a substantial increase in agricultural production. Industrial production was also likely to increase sharply, if, as expected, several large infrastructure projects are able to get off the ground.

An calculation shows that if the rate of growth of domestic capital goods industry in 1997-98 were of the same order as in 1995-96 or 1996-97, the industrial rate of growth in 1997-98 would have been as high as 9.2 per cent. With a boost in infrastructure and other investments in 1998-99, this order of growth is not beyond reach, he said.

Jalan said India's export performance in 1997-98 was less than satisfactory. In 1998-99, all efforts were made to achieve export growth of 20 per cent in dollar terms as announced by the government and as endorsed by the exporting community. To help these efforts, as a special and temporary measures, the RBI was announcing a sharp reduction in interest rates applicable to incremental exports.


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