By Manoj Kumar
NEW DELHI (Reuters) - The government aims to attract dollar flows from non-resident citizens to support the rupee and has dropped the idea of a sovereign bond for now, two senior government officials familiar with the matter told Reuters on Monday.
Some financial market participants had speculated the government would issue an overseas bond to raise foreign money to defend the rupee, which fell to a record low earlier this month, like it did during previous bouts of rupee volatility in 2000 and 1998. The Reserve Bank of India does not support issuing a sovereign bond either, one official said.
"All have agreed that it is not a time for India to issue sovereign bonds at this stage," the official said. "We do not have much options. Whatever has to be done, will be done in the next few weeks," the official said. "We have a window of only few weeks," he said.
"The government could ask banks to raise interest rates to attract an additional $15-20 billion," he said, adding that inflows of money from NRIs into India had risen anyhow after the rupee's rapid decline.
The rupee has steadied somewhat since the RBI took unprecedented steps last week to try to create demand for the currency by aggressively draining cash from money markets and sharply raising short-term interest rates.
Traded at around 59.59 per dollar on Monday, it is about a percent above its record low of 61.21 hit on July 8.
Some of the rupee's 12 percent fall since May reflects a broad sell-off in emerging markets on signs of a winding down of U.S. stimulus. But there are also specific fears about India's slowing economy, lack of substantive reforms and its large current account deficit.
Foreign fund outflows from India's debt and equity markets have reached $11.5 billion since late May.
Measures from the Indian stock market regulator aimed at curtailing speculative positions against the currency gave it some reprieve, but market participants are bracing for a rise in policy rates or other aggressive measures to attract foreign money.
"We understand that we need funds to finance our current account deficit but we do not want to send any signal of panic outside India," a second official said.
The government's first line of defence therefore would be to woo non-resident Indians (NRIs), even possibly raising the yields on deposits for these non-residents, the sources said.
The government sources said India could consider raising the policy repo rate if the rupee falls towards 61-62 to the dollar, citing recent meetings between the government and the RBI.
The government is also considering attracting inflows by allowing select companies such as state-run India Infrastructure Finance Co Ltd or IDFC Ltd
The 10-year benchmark 7.16 percent, 2023 bond yield jumped 8 basis points to 8.08 percent after the news, while the rupee barely reacted.
Bloomberg Television subsequently quoted India's Chief Economic Adviser Raghuram Rajan as saying the government "has not dropped any options" for stabilising the rupee.
(Editing by Neil Fullick)
