India Eases Export Credit Rules as Overseas Shipments Slow

By Kartik Goyal

Dec. 6 (Bloomberg) -- India’s central bank today eased rules governing interest rates for loans taken by exporters as a recession in the U.S. and Europe, its biggest markets, damped demand for the nation’s products.

The Reserve Bank of India said interest on overdue bills up to 180 days will be charged at not more than the benchmark prime lending rate minus 2.5 percentage points.

India’s overseas shipments fell in October for the first time in seven years, hurting the profit of exporters reeling under the impact of waning global demand. Easier credit rules, along with the central bank’s interest rate cuts for the third time in less than two months, will help exporters.

“The measure will help reduce the cost of credit to exporters which are facing the most stressful time as demand dries up in the U.S. and other European countries,” said Ajay Sahai, director general of the Federation of Indian Export Organizations.

Exports in October fell 12 percent to $12.8 billion from a year earlier. The last time exports fell was in October 2001, when they declined 7.4 percent, according to data compiled by Bloomberg News.

“Exporters who have drawn bills for shorter maturities and are facing difficulties in realizing the bills on due dates on account of external problems” will benefit, the bank said.

Weakening Growth

The worst financial crisis since the Great Depression has pushed economies from Japan to Europe into a recession, cutting demand for goods made in the Asia-Pacific region. Flagging exports and waning domestic demand are forcing companies in India to cut production, weakening growth in an economy expected by the central bank to expand at the slowest pace in four years.

To spur local demand and shield India’s $1.2 trillion economy from the global slowdown, the central bank today cut its benchmark lending rate to 6.5 percent from 7.5 percent. The bank also cut the reverse repurchase rate at which it borrows overnight to 5 percent from 6 percent.

India’s economy may slow to 7.5 percent in the year to March 31 after expanding 9 percent or more annually in the previous three years, the central bank has said.

“The measures are aimed at reducing downside risks to the slowing economy,” said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor’s. “The steps announced today are definitely positive.”

Indian companies have also been allowed to buy back foreign- currency convertible bonds. The central bank will consider buyback proposals provided that there is a minimum discount of 25 percent on the book value, the amount of the buyback is limited to $50 million of the redemption value and the resources for buyback are drawn out of a company’s internal accruals, the Reserve Bank said.

“The facility for premature buyback of bonds will help Indian companies to take advantage of the current discounted rates at which their foreign-currency convertible bonds are trading,” the central bank said.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.