Currency call

New Delhi, June 17: The Centre may ask the State Bank of India to issue long term foreign currency denominated infrastructure bonds targeting NRIs and other overseas investors to rake in much needed dollars to shore up a weakening rupee.

The rupee, which fell 10 per cent between May and mid-June against the dollar to 58.9 on June 11, has been under attack as foreign institutional investors pulled out more than $3-billion from local debt markets.

This aggravated a situation that has been building up because of the rising purchase of crude and bullion in dollars and high debt repayment demands from Indian companies who had borrowed abroad even as exports remained sluggish.

The net result of all these demands has been that India’s forex reserves have fallen to $289 billion from $308 billion in December 2011, a 6.16 per cent fall in one-and-a-half years.

Finance ministry officials said the Reserve Bank of India’s decision to keep interest rates unchanged would help prop up the rupee as well as any bonds issue. The falling rates in India had reduced the arbitrage for foreign investors and resulted in money being pulled out of India’s debt market.

The government is unwilling to raise sovereign bonds itself but will prefer the SBI to raise dollars through long-term bonds. The SBI had raised forex earlier, too, through the Resurgent India bonds in 1998 and the India Millennium Bonds in 2000. The government holds a 61.58 per cent stake in the SBI.

The bonds could be denominated in dollars, pound sterling and the euro. Officials said the difference this time round would be that it would be specifically used for infrastructure building and open to both NRIs and other investors.

If India is unable to attract hard currency, the steep depreciation in the value of the rupee can continue unabated. SBI bonds and changes in FDI policy are seen as ways to attract foreign exchange.

The North Block had proposed a dollar bond float last year itself and the issue has been on the radar ever since. Earlier this year, chief economic adviser Shankar Raghuraman had indicated that a bond issue was likely.

Indian banks hold around $55 billion in NRI deposits under various schemes. In 2011-12, NRIs deposited around $11 billion in Indian banks compared with $3 billion annually on an average in the previous five years. According to analysts, the NRIs’ appetite for Indian deposits has increased with the financial turmoil in the West.