Financial Times

Export competitiveness improves, Central Bank says
The country's export competitiveness has improved given the depreciation in the real effective exchange rate despite the strengthening of rupee against the US dollar, the Central Bank, said.

"The rupee's depreciation against other major currencies and the faster decrease in domestic inflation have resulted in the real effective exchange rate recording a depreciation, indicating an improvement in the competitiveness of the country's exports," it said.

The 24-currency real effective exchange rate (REER) has depreciated by about 4.2 per cent in 2003 up to October 15. The rupee depreciated against the US dollar up to June, but has appreciated since then.

Exporters have complained that the sudden strengthening of the rupee against the dollar has eroded their competitiveness, especially against cheap exports from China.

The Central Bank said that despite its appreciation against the dollar, the rupee has weakened against other major currencies such as the euro, the sterling pound and the yen.

"Most major currencies have appreciated against the US dollar," it said
The country's gross official reserves have increased to around US $ 2,065 million by end-August 2003 from US$ 1,700 million by end-December 2002.

The total gross international reserves increased to US $2,903 million, which is equivalent to about 5.3 months of imports, at end-August 2003. The Central Bank said that given improved economic fundamentals such as the steady decline in inflation, it has decided to reduce its Repurchase Rate by 50 basis points and the Reverse Repurchase rate by 100 basis points.

With this revision, the Repurchase rate and Reverse Repurchase rate would be 7.00 per cent and 8.50 per cent, respectively. The change in the rates narrows the corridor between the Repo rate and the Reverse repo rate.

"A narrowing of the corridor is appropriate as the level of interest rates has declined and the bid-ask spread in the call market has decreased," the bank said.
"The Central Bank expects a strong response to the lowering of rates from all financial institutions through an adequate and immediate reduction in their lending rates, and communication to the market of the new rates."

The next regular statement on monetary policy would be made on November 11. "The continued decline in inflation and inflationary expectations, the improvement in the external sector, containment of public sector borrowing, and growth in money supply and credit, have enabled the Central Bank to reduce its policy rates."

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