The Resurgent India Bond to be floated by State Bank of India (SBI) will have a tenure of five years. However, the impact of foreign currency inflow is expected to be marginal, according to an SBI study.
The study has noted that SBI will have three options to deploy the funds that are raised through these bonds. The funds can be deployed abroad to fund the bank's overseas operations. This will,however, not create any positive impact on the country's balance of payment.
The second option would be to convert these funds into rupees and on lend in India. This option would necessitate hedging of the exchange rate risk which would be very costly. Lastly, the funds can be on-lend as dollar-denominated loans to Indian corporates. The study has said that the third option would mean shifting the exchange risk to corporates. However, it has added that corporates having a natural hedge in terms of export receivable may find this route attractive vis-_-vis external commercial borrowings which now face a withholding tax.
While presenting the union budget, the union finance minister had proposed that SBI would float a Resurgent India Bond which would enable NRIs to contribute to the flow of resources for building up the country's infrastructure. The bond will be fully repartriable, and the government will extend tax concessions similar to NRI deposits.
SBI has pointed out that budgetary measures such as speedier clearance of FDI proposals, the India Millennium Scheme and the Resurgent India Bonds may not create any noticeable impact on the balance of payment. "Further, some of the existing inflows in the form of FCNR deposits, FII investments and ECBs will be diverted to these avenues thereby making the overall short term impact negligible," said the study.
However, the Resurgent Bonds will change the maturity pattern of India's foreign exchange liabilities. There will be a shift from short term liabilities like FCNR (B) deposits to long term resurgent bonds. This will take off the repayment pressure in the short term.
SBI has also stated that the introduction of Resurgent Bonds and Millennium schemes will reduce the flow of funds in NRI deposits of banks. Consequently, banks will have to offer higher interest rates on these deposit to attract new deposits and retain existing ones, added the study. Overall, this is expected to increase the cost of raising deposits for India.
Even the corporates are expected to see a hike in interest rates on their ECBs, bankers feel.
