Hike in export refinance limit to bridge liquidity gap: M&M

The central bank's move to keep rates unchanged disappointed both the equity and bond markets. However, the Reserve Bank has decided to enhance the export credit refinance (ECR) limit to 50% of the outstanding rupee export credit for banks, from 15%. This move will inject Rs 30,000 crore into the system.

Welcoming this step, VS Parthasarathy of Mahindra and Mahindra (M&M) highlighted the dual impact of this move. "It gives two impacts, it gives liquidity and secondly it has a basis of getting rates reduced for the exporter or it gives a little bit of cushion for the bank to act the way that they want." He further pointed out that there is liquidity crunch of about Rs 100,000 crore in the market and this would bridge atleast a gap of Rs 30,000 crore. Below is the edited transcript of Parthasarathy’s interview with CNBC-TV18. Also watch the accompanying video. Q: What is your reaction to the policy because the RBI clearly has decided to target inflation even if it is at the expense of extremely slow growth? For the auto sector there is just about hanging on to double digit growth. Do you see that dwindle through the course of this year and perhaps get into single digits as well? A: The markets have already spoken and there is widespread disappointment about RBI’s inaction on the policy front. The message from RBI seems to be that the government must act because there are major macro actions, which are required on this front. But from our perspective, not withstanding we do hope that there would soon be a combined action of government and RBI to salvage investment sentiment and demand. However the export credit policy of making 50% available on refinance is a welcome step because that does infuse funds into the market. Q: With respect to this limit hike in export credit refinance what was a bigger problem? Was it the availability of credit and hence this hike in limit will actually help many of the exporters or the problem was the higher rate of interest? A: Just to give a simple example, earlier if USD 100 was the export done, banks could get refinanced to the extent of USD 15. Now with this they can get USD 50 instead of USD 15. As RBI said Rs 30,000 crore will get available as additional funds in the market. The other part is that if this money is full reinvested in export financing itself then it further does a multiplier effect and more money can be available than just Rs 30,000 crore. Therefore, it gives two impacts, one it gives liquidity and two, it has a basis of getting rates reduced for the exporter or it gives a little bit of cushion for banks to act the way that they want. So, both of which are positive signs. Q: Do you think the lack of any moves on account of CRR is made up by this particular announcement of the RBI, will the short fall in the deficit be matched? A: There is a liquidity crunch to the extent of say depending on who you believe is about Rs 70,000 crore to about Rs 100,000 crore in the market. This in some way bridges to about Rs 30,000 crore assuming they can act. So, clearly part of a CRR cut you can say is made up by this initiative but it can be a little bit more if the banks do focus on exports and business do focus on exports. So that’s a positive news and make up for some of the CRR cut.