India has had a history of falling back upon its NRIs to bail them out in the event of a likely currency crisis. The first time India actually did that was in the aftermath of the Pokhran sanctions in 1998 when it raised $5 billion through Resurgent India Bonds. Later in 2000, in the aftermath of the tech meltdown, a similar amount of $5 billion was raised through Indian Millennium Deposits. The biggest round of such fund raising was in 2013 when the rupee had touched close to 69/$. Dr. Raghuram Rajan had helped raise $35 billion through Special FCNR Deposits. Why is there a case, once again, for the RBI to raise money through NRI bonds?
Forex reserves are dipping
The forex reserves data clear shows that India’s forex reserves have fallen from a level of $428 billion down to $413 billion. This has largely been driven by RBI selling dollars in the open market to stem the fall in the rupee. The comfort of reserves is normally measured in terms of the number of months of import that the reserves can cover. Currently, total imports are likely to touch $520 billion for the full fiscal year. That means; the reserves position is just about sufficient to cover about 9 months of imports, which is not a very comfortable scenario. The best way to shore up the reserves will be through the issue of NRI bonds. That will help bring the forex reserves level back to the level of the BRICS economies.
Macros are a worry
The real worry for the RBI is on the macros front. There are 3 major concerns here. Firstly, the price of Brent crude is already close to the $80/bbl mark and that is putting pressure on the trade deficit due to 75% dependence on oil imports. Secondly, any weakness in the rupee could lead to portfolio outflows putting further pressure on the reserves position. Last, but not the least, the government expects that greater trade barriers could put further pressure on exports while India’s oil imports are largely inelastic. Fed rate hikes over the next 2 years will only aggravate the situation. RBI may not be able to show the same hawkishness and that could put further pressure on the INR and on the forex reserves.
NRIs love these bond
For NRIs, these bonds have been like a dream come true. Firstly, these bonds offer very attractive rates of interest, being special deposit schemes. Secondly, these bonds do not carry any currency risk. While the banks are the issuers of these bonds, the currency risk is offloaded to the RBI. Lastly, NRIs have an arbitrage wherein they can borrow at lower rates and invest in these bonds earning a clear spread. With $27 billion worth of loans and bonds maturing by 2019, the RBI may not really have much of a choice. It’s time for the next NRI bond issue!