Increasing the limit of export credit refinance would provide necessary liquidity to micro, small and medium enterprise (MSME) export sector, but further cut in interest rates may be an effective option to boost sagging exports, exporters body - FIEO has said reacting to the RBI's move on Monday to kept key lending rates unchanged.

The Reserve Bank has decided to enhance the Export Credit Refinance (ECR) limit to 50 percent of the outstanding rupee export credit for banks, from 15 percent, a move that will inject Rs 30,000 crore into the system.

"With a view to enhancing the credit flow to the export sector, it has been decided to enhance the eligible limit of the ECR facility for scheduled banks (excluding RRBs) from 15 percent of the outstanding export credit eligible for refinance to 50 percent, effective fortnight beginning June 30, 2012," RBI said in its mid-quarterly policy review on Monday.

Commenting on this, Federation of Indian Export Organisations (FIEO) President, M Rafeeque Ahmed stated that in order to further augment liquidity and encourage banks to increase credit flow to the export sector, the Reserve Bank has increased the limit of export credit refinance from 15 percent of outstanding export credit of banks to 50 percent, which will potentially release additionally liquidity of over 300 billion, equivalent to about 50 basis points reduction in the CRR.

"This would help the banks to replenish the funds earmarked for the MSME export sector and ensure that funds are easily available to the sector in adequate measure," he added.

FIEO chief stated that policy rates were increased 225 basis points in 2011 and a cut of 50 basis points has  already taken place in 2012.

He, however, pointed out that the apex bank should have gone for a rate cut in the background of the global economic uncertainties and the tough challenges being faced by the country's export sector at present.  

A IMF study shows that 1 percent cut in interest rate is equivalent is 10 percent depreciation if nominal effective exchange rate and although price elasticity of Indian exports is low it may be appropriate to exercise the option of a interest rate cut  in the current fragile global situation given  the poor IIP performance/ fall in GDP to a 10 year low,exports on the down-trend in the last 3 months, FIEO said.