India’s banking clean-up act is going to hurt its foreign trade

Importers are impaired, exporters are nervous, cost of credit could be on its way up, the rupee may weaken against the dollar, and investors are stunned. Stocks of public sector banks fell over 2 percent in early trade on Wednesday.

All because the Reserve Bank of India (RBI) decided on March 13 to bar banks from issuing letters of undertaking (LoU)—guarantees issued by Indian banks to foreign banks or branches, based on which foreign lender then provides loans to Indian firms.

The RBI’s...

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