RBI increases rate of interest subvention

To boost exports and attract dollars, the Reserve Bank of India (RBI) has decided to increase the rate of interest subvention on pre- and post-shipment rupee export credit for certain employment-oriented export sectors from two per cent to three per cent, effective August 1.

RBI has asked banks to reduce the interest chargeable on exporters according to the base rate system eligible for export credit subvention, subject to a floor rate of seven per cent. “Banks may ensure to pass on the benefit of three per cent interest subvention completely to eligible exporters,” RBI said.

“We can expect these steps to have an impact on the rupee a few months down the line. Immediately, these won’t help,” said a currency dealer with a public sector bank.

On Monday, the rupee again breached the 64-mark against the dollar, owing to month-end dollar demand from importers. It closed at Rs 64.31 a dollar, compared with its previous close of Rs 63.35, a depreciation of 1.52 per cent. During intra-day trade, it touched a high of Rs 63.65 and a low of Rs 64.75. It had opened the day at Rs 63.39. There is concern a slowing economy would make it tough to attract foreign institutional investors.

Last week, the rupee had touched an all-time low of Rs 65.56 against the dollar, after minutes of a US Federal Reserve meeting hinted the US was on course to taper its stimulus as early as next month.

Experts believe the rupee might fall further in the near term. “Current volatility and weakness, leading to fragile sentiment, have driven the currency to uncharted territory. In such an environment, the rupee could test further new lows with heightened volatility. That’s why market participants are reluctant to make near-term forecasts. However, we believe the current levels reflect the realistic value of the currency,” Rajesh Cheruvu, chief investment officer (India), RBS, said in a note to clients.

Tracking the weak rupee, government bond yields rose on Monday. The yield on the 10-year 7.16 per cent government bond ended at 8.34 per cent, compared with its previous close of 8.26 per cent. However, the auction of 48-day cash management bills for a notified amount of Rs 11,000 crore sailed through, despite the liquidity crunch in the system. The cut-off yield was 11.8936 per cent
.