Exporters lose interest in EEFC accounts balance

MUMBAI: With the rupee weakening against the dollar in 2008, the Reserve Bank of India (RBI) has decided to withdraw some sops extended to exporters, when the domestic currency firmed to around the 39 level in 2007. The withdrawal of sops has been announced after consulting with the central government.

In a statement issued here on Monday, RBI said it has decided to discontinue payment of interest on balances parked in exchange earner’s foreign currency (EEFC) accounts from November 2008. The scheme, which RBI had unveiled in October 2007, was operational till October 2008. According to the scheme proposed, exporters were allowed to earn interest income for balances up to $1 million parked in EEFC accounts. At the time of allowing interest payments, the central bank had clarified then that this was purely a temporary measure.

According to the notification from November 1, 2008, all EEFC accounts will be treated as non-interest bearing current accounts. Standard Chartered Bank head of forex and derivatives trading (South Asia) Agam Gupta said, “The scheme did not take off well due to low amounts involved and so discontinuing interest payments on it would not have a far-reaching impact. However, lack of interest payments could lead to some exporters pulling their forex funds out and converting them into rupees, which would improve supply of rupee-funds in the market. The interest rates were left to banks to decide, and some of them could have been linked to the London inter-bank offered rate (Libor).”

Through 2007, the Indian rupee rose 13% against the dollar on account of heavy foreign fund inflows. In a bid to contain price levels and inflationary expectations, RBI, too, stayed away from artificially managing the exchange rate.

The move to pay interest on balances parked in EEFC accounts was a part of the relief package announced by the government a year ago. In July 2007, the Centre had announced measures such as speedier reimbursement of dues to exporters, reduction in pre-shipment and post-shipment credit and revision in drawback and rates on the duty entitlement pass-book (DEPB) scheme.

In October 2007, the Centre announced steps to widen the coverage and extend the time period of the reduced export credit, refunding service tax on three more services, a provision to pay interest on EEFC accounts and an increase in the revenue ceiling on Vishesh Krishi and Gram Udyog Yojana (VKGUY). The government had then said EEFC accounts would attract interest payments, subject to a set of conditions. Even as banks were given the flexibility to decide how much interest to pay on balances parked in these accounts, the Centre fixed the limit of outstanding balances at $1 million.