by Moiz Mannan
Some say it will be sovereign bonds, others predict a hike in deposit rates while yet other foresee an exclusive bonds issue coming. Experts and insiders are unanimous though that whatever form it takes, the Indian government’s impending move to save the plummeting rupee would heavily rely on non-resident Indians (NRIs).
In this space around a month back, we had noted the strong possibility of some kind of ‘diaspora bonds’ involving investment in infrastructure projects. At the same time, some sections of the Indian media had quoted finance ministry sources to say that India might issue sovereign bonds to control the plunge of its currency.
Foreign Institutional Investor (FII) flows have been extremely volatile and are one of the main reasons for the rupee’s steep decline. In June 2013, on fear of US Federal Reserve reducing quantitative easing, FIIs pulled out over $7.5bn. This massive outflow caused the rupee-dollar rates to plunge by over 6pc, taking it to an all-time low of Rs61 against the US dollar. A similar trend was seen in April and May 2012 with the fear of the Greek exit from the Eurozone. FIIs pulled out over $690m over the two months and the rupee depreciated by 8.93pc to Rs55.73 from Rs51.16.
In the past few days, the Reserve Bank of India (RBI) has taken a number of measures to drain cash and reduce liquidity in the banking system to check speculation in the foreign exchange markets to prevent the rupee from depreciating further. The RBI’s measures have made holding dollars far more expensive, prompting investors, particularly foreign banks, to liquidate dollar holdings, which helped the rupee.
However, we also saw last week that volatility in India’s rupee fell to a one-month low on speculation that the apex banks measures to boost returns on local-currency assets would be offset by the country’s slowing growth and record current-account deficit. The beleaguered currency rose marginally against the greenback mid-week after plunging to an all-time low of 61.21 per dollar on 8 July. Agencies have quoted senior government officials as acknowledging that India was running out of options and time to reverse the fall. According to Reuters, the officials ruled out the possibility of a global sovereign bond as a remedy as that would send distress signals to international markets.
However, a report in the Business Standard on Wednesday said the finance ministry was considering issuing sovereign bonds to raise dollars from global investors, rather than restricting the exercise to non-resident Indians (NRIs). Ministry officials were quoted as saying that such bonds might be issued at regular intervals, but that the ministry would wait to see the impact of RBI’s steps in this regard.
There was a bit of scepticism whether bonds issued exclusively for NRIs would yield the desired results at the overseas Indians might be inclined to simply shift funds from bank deposits to bonds. The paper quoted experts as saying that although NRI bonds had a risk of money being shifted from bank accounts to bonds, these promised more stable funds. NRI bonds, they felt, may have a better success rate because of the added factor of patriotism among the diaspora.
Further, there has been a debate within the government departments on whether a sovereign bond should be issued through public sector banks such as the State Bank of India (SBI), as was the case in the past, or directly by the government. It had been reported earlier that the SBI as well as the apex bank had reservations about taking the public sector bank route.
Some senior officials have said that an increase in central bank policy rates and allowing select firms to raise capital overseas were also being considered. The government might ask banks to raise interest rates to attract an additional $15-20 bn, it was felt. According to RBI data, NRIs already hold more than $100bn in funds in India. Overseas Indians had $58bn in dollar deposits as of September 2012, besides Rs3tn deposits in rupees.
The government is also considering allowing select companies such as state-run India Infrastructure Finance Co Ltd or IDFC Ltd (IDFC.NS) to raise up to $4 bn in debt abroad, they said. Estimates put the amount of NRI funds that the government might get to convert to bonds at around $20bn, which could give enough cushion for the RBI’s rupee defence. Foreign brokerage Bank of America Merill Lynch (BofA-ML) meanwhile issued a statement saying the rupee could depreciate to 65 to the dollar, if India does not go in for an NRI or sovereign bond issue.
Bankers and analysts estimate the government will have to pay between 5 per cent and 6 per cent on domestic dollar deposits for a 5-year period if it wants to lure overseas Indian money. However, NRIs might not be very eager to put money if the bonds were to be rupee-denominated because of the risk of the currency falling further.
Some other discouraging factors for NRIs to commit substantial investments would be the slowing down of the economy, sagging foreign direct investment and a record current account deficit staring India in the face.
Worst of all is the certainty of uncertainty hovering over the country’s political firmament after the 2014 general elections.
But then, again, if the government is able to strike the right chords the diaspora might rise to the occasion again and invest from the hear t rather than from the head.
