NRI bond pill for rupee

India is considering another NRI bond to arrest the fall of the rupee, which had plunged to an all-time low of 72.11 to the dollar on Thursday only for the RBI to intervene a lift it up to 71.73 on Friday.

By Jayanta Roy Chowdhury
  • Published 10.09.18
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New Delhi: India is considering another NRI bond to arrest the fall of the rupee, which had plunged to an all-time low of 72.11 to the dollar on Thursday only for the RBI to intervene a lift it up to 71.73 on Friday.

The rise in the rupee has not only raised fuel bills, besides making imports expensive, but also eroded the country's huge forex reserves. India's forex reserves stood at $400 billion on August 31, down $4.1 billion since the beginning of the month and $26 billion since April.

Officials said the idea had been thought of earlier, too, but did not find favour because the forex reserves had provided a cushion even as the government balked at the interest costs of the NRI bonds.

However, the rupee, which has fallen 11 per cent since the beginning of the year, has already attracted attention as being the worst performer among the major Asian currencies. The fall not only makes energy imports costlier but also means the country has to shell out more to repay foreign currency short-term debt.

India's oil import bill is expected to go up $25 billion this fiscal, while the cost of servicing short-term borrowings will rise $9.5 billion.

"All these factors have made the NRI bond idea more attractive now," said the officials.

India had earlier raised NRI bonds in 1998 and 2000. In 2013, the RBI raised foreign currency deposits through a subsidised scheme to shore up its reserves.

The BJP-led government could go in for the NRI bond scheme to lift the value of the rupee and to prevent the Opposition from taking up the issue as a sign of the Centre's poor economic management.

In the 2014 general elections, the BJP had made the fall in the value of the rupee a key issue. In its manifesto, it had declared: "The Congress party has lowered... the dignity of India. This is what is driving recent adversities like the falling rupee."

Brokerage firm CLSA recently in a note said, "Our meetings in Delhi in early August had highlighted that the government may plan some measures such as a foreign currency bond or NRI deposits - similar to that seen in 2013 - a period of taper tantrum."

However, economists have also argued that such bonds are costly as hefty interest rates have to be paid in foreign currency. Niti Aayog vice-chairman Rajiv Kumar, for instance, has advocated that the rupee should be allowed to find its natural level.

Besides a watch on emerging market currencies ever since the Turkish lira started falling, Indian policymakers are studying the policy indications coming from the US Federal Reserve, which seems keen to continue reining in its policy rate.

Federal Reserve chairperson Jerome Powell had last month stated that the "consensus view" is that gradual interest rate rises remained the best policy.

Also worrying is president Donald Trump's trade wars with China and to a lesser extent with US' allies - the European Union and Nafta members - which could strain the international trading arrangements and create more protectionist walls.

"This could mean continued challenges for emerging market currencies," said the officials.

In a note to investors, Singapore-based international financial services group DBS has warned that the Argentinian peso and Turkish lira "have been struggling with rising US rates since the start of the year because of deficits in their fiscal and current account balances".

Trade wars could result in capital fleeing, leading to "financial instability, especially in countries that have high external debt levels".

These kind of advisories have led traders and investors to fear a contagion effect and a repeat of the 1997 Asian financial crash or the "tequila effect" of Mexico's 1994 financial crisis.