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Exports to face heat of interest rate hikes: FIEO
Nov '10
Mr A Sakthivel, President, Federation of Indian Export Organisations (FIEO) while commenting on the Second Quarter Review of the Monetary Policy 2010-2011 stated that with overall inflation barely receding to single digit levels (9.8%) but much above the “comfort zone”, a hike in policy rates was in the offing.

The increase in the repo and reverse repo under LAF by 25 basis points each would maintain the existing differential between the two policy rates but at the same time the increase in the reverse repo under LAF would also increase the rate of export credit for a second time. President, FIEO stated that with another bout of increase in policy rates, the interest rate differentials would be much higher and more attractive for arbitrage flows and announcements of the US Federal Reserve later this week must be closely monitored.

The strengthening rupee, burgeoning current account deficit and the possibilities of asset bubbles being fuelled by cheap overseas money is bound to impact the economy as a whole with exports being hit by an appreciating rupee eating into lean export margins, observed Mr Sakthivel, FIEO Chief elaborated that further, while current account deficit may be fed by foreign inflows the volatility of these inflows would need to be contained for macro-economic stability by placing restriction on minimum period of investment by FII of at-least 12 months. FII should be allowed repatriation only after investment remains in India for 365 days or more.

Mr A Sakthivel stated that the High Level Task Force on MSMEs while taking cognizance of the credit off-take pick-up at 20.1% as per the RBI's data release of 29th October, 2010 must ensure that export credit is stabilized preferably at base rates so that exportsretain their momentum in the face of adversities such as the appreciating rupee, moderate global trade prospects and price sensitive global markets.

Federation of Indian Export Organisations (FIEO)

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