Commenting on the Monetory Policy review, Mr A Sakthivel, President, Federation of Indian Export Organisations (FIEO) stated that the narrowing of the LAF Corridor by raising repo rate by 25 basis points to 6% and revere repo rate by 50 basis points to 5% would improve the transmission of policy rates vis-à-vis lending rates of banks.

Further, the recommendations of the Panel on LAF and Monetary Policy (as and when released) which has export credit refinance as one of the terms of reference would be noteworthy for the export sector in particular.

FIEO Chief elaborated that LAF had earlier been widened from 1 percentage point in October, 2006 to 3 percentage points by July, 2008 to discourage ‘carry rate’ imposing a quantitative limit of Rs. 3000 crores of LAF in 2007 at the peak of global liquidity. Now, post-crisis there is a consistent alignment between reverse repo and repo rates and it is hoped that a single rate in the future can influence the money markets to work more efficiently.

Mr Sakthivel elaborated that the recent Sept 10, 2010 RBI release indicates a credit off-take of 19.4% vis-à-vis 14.1% in the corresponding period last year and due to more borrowing for busy season ahead including that for the export sector (October-March) funding capacities of the banks may be stretched who have already lent 72% of their deposits at present. Since export credit rates now stand de-regulated in the Base Rate regime, the Ministry of Commerce may need to monitor periodically that export credit rates do not increase any further in case of a liquidity crunch. Exporters should be provided export credit at the base rate itself added Mr Sakthivel.