The bond markets have welcomed the news of the State Bank of India's proposed NRI bonds, and it has also halted the rupee's slide. However, yet another round of foreign borrowing being considered indicates the gravity with which the government and the central bank view the situation on the external front.
The Reserve Bank of India first tried to stem the fall in the rupee by tightening liquidity. It was soon realised, however, that there was little speculation by banks in the Indian markets, and attention shifted to exporters not bringing back their proceeds. Exchange Earners' Foreign Currency (EEFC) Accounts were accordingly targeted.
This provided some respite, but the repatriation of EEFC
balances could only have a one-off effect. For the effect to be maintained, it was imperative to change expectations about rupee depreciation.
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These expectations have gained strength from the continuous rise in oil prices. The RBI's worry over the rise in the oil import bill has been made amply clear in its annual report: the comfort level of oil imports would be at around a fifth of the total import bill.
During the first quarter of this fiscal, oil imports have been around 29 per cent of the total import bill, far above the central bank's danger mark.
Since June, the further rise in international crude prices has raised the proportion of oil imports even higher. The value of oil imports, year-on-year, has doubled. This has set the red lights blinking at the RBI. Hence the replay of the Resurgent India Bonds.
Recourse to such bonds is a tried and tested exercise: there have been the India Development Bonds, the Resurgent India bonds (RIBs), and now this latest incarnation. The last time round, the bonds were issued when it was feared that the fallout of the Asian crisis would impact the rupee as well.
Clearly, this time too the RBI feels that a crisis of the same proportions is in store for the rupee. The proceeds of the issue will bolster the RBI's foreign currency reserves, which are likely to
see a substantial draw-down. It can be argued, however, that even with the higher oil prices, there is no reason for alarm. The trade deficit for the first four months of the year was $3.71 billion dollars, as against $3.02 billion in the corresponding four months of 1999.
The growth in invisibles should be enough to ward off serious concern on the balance of payments front, and the current account deficit is expected to increase only modestly, to less than 2 per cent of GDP, from 1.2 per cent last year.
But the RBI evidently thinks otherwise. Of course, there's nothing wrong with temporary borrowing to tide over a crisis. The question however is, will this borrowing be temporary, or is the problem more fundamental?
This time, the rate of interest will probably be higher than that paid for the RIBs. But now that the markets expect US interest rates to move downwards, perhaps it would be better to postpone the fund-raising exercise.