The reported sanction of a loan by the World Bank on commercial terms for the recapitalisation of Indian banks is surprising. World Bank knows that there is no shortage of forex for India. Is it because it is running short of creditworthy clientele? For India, the loan means an addition to the already heavy external debt. If the money is converted into rupees and given to banks, the RBI will have to face the problem on the money supply front.
The government could have followed the earlier procedure of recapitalising banks through the injection of rupee resources asking them to reinvest them in government securities. It would have been a cash-neutral transaction. Forex is a real resource unlike the rupee. The beneficiary banks may well be advised to keep the capital in forex and deploy them for their external transactions.
A Seshan, on email
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