RBI rolls back Re support steps

MUMBAI, JAN 5: The Reserve Bank of India RBI has withdrawn the interest rate surcharge on imports and also the prescribed minimum intere...

MUMBAI, JAN 5: The Reserve Bank of India RBI has withdrawn the interest rate surcharge on imports and also the prescribed minimum interest rate in respect of overdue export bills, both measures imposed in May last year to even out trade flows and curb rupee volatility.

This decision was taken in view of the comfortable situation of the foreign exchange reserve position and also relative stability of the Indian currency against the US dollar in recent weeks. The stability of rupee was mainly derived from the inflow of 5.9 billion foreign currency deposits into the country through the launch of Indian Millennium Bonds by the State Bank of India in November last year.

A statement issued by the RBI today said that the interest rate surcharge of 50 per cent on import finance which had been in force since May 26 last year will be withdrawn with effect from tomorrow. Banks were required to charge a minimum rate of 25 per cent interest on overdue exports bills. This stipulation will also withdrawn with effect from tomorrow. Banks would henceforth have the freedom to decide the appropriate rate of interest on overdue export bills. However, the present procedures for ensuring that there was no deliberate attempt to delay repatriation of export receipts would remain in force, the statement added.

Traders said the move signalled the central bankacirc;euro;trade;s comfort with the rupeeacirc;euro;trade;s current level, and as a reaction, the rupee could weaken slightly in the next few trading sessions. The rollback meant importers will now be able to advance their foreign currency payments availing cheaper import finance and exporters will not be penalised heavily for holding back their receipts overseas, they said. acirc;euro;oelig;Iacirc;euro;trade;ll be mildly bullish on dollar-rupee but its unlikely that the rupee will weaken much. There are enough inflows of dollars at the moment,acirc;euro; the chief dealer at a European bank said, adding it signalled the RBIacirc;euro;trade;s comfort with the current situation.

After the surcharge was imposed, bankers said even prime customers were paying over 18 per cent for import finance. acirc;euro;oelig;The RBI measures will accelerate imports and dollar supplies may reduce. I see the rupee in a 46.80-46.87 range over the next few days,acirc;euro; said a banker, adding the central bank appeared ready to let the rupee adjust to flows rather than buy dollars.

Foreign exchange reserves are currently at record highs at 39.8 billion. Traders said the central bank had also purchased the larger dollar inflows in recent weeks. Having reduced the high rates exporters and importers are currently paying, the central bank may not be inclined to reduce the key bank rate in a hurry, analysts said.

The market had been expecting downward revisions in domestic rate after the US Federal Reserve indicated a bias for lower rates late last year and, in a surprise move, cut the Fed rate by 50 basis points to six per cent on Wednesday.But analysts argue that the eight per cent bank rate, at which the RBI lends most of its refinance and to which bank lending rates are linked, was already quite low and interest differentials with the US need to be maintained.