Floating NRI bond: A worthwhile idea whose time may not have come yet Noor Arora
The first intervention of the government in steadying the rupee has been by announcing measures on ECBs, FPI and Masala bonds. Clearly the focus is on looking at enhancing capital flows. Quite expectedly this hasn't quite cheered the market and the rupee continues to fall due to external factors which no one has control over. The talk is now on having a NRI bond floated. The concept of a NRI bond is not new and has been used in the past when conditions were desperate. These were in the form of the Resurgent India Bonds (RIB in 1998) or Millennium India Deposits (MID in 2000) which targeted NRIs. The idea is to get NRIs to invest in such bonds which give better returns than their domestic deposits which helps to garner dollars. Last time the RBI provided the swap facility on FCNR deposits which achieved the same purpose. Two issues arise here. First, is this necessary in the current context and second, will it work? The forex reserves are presently at $ 399 bn which though just below the psychological mark of $400 bn is quite comfortable. Depreciation of rupee is more due to global factors which includes US' standoff with China, Turkey and Iran. These tensions will pervade the currency markets for at least another 3 months and the dollar will strengthen thus causing others to decline. No other country is planning such a measure and hence there is little justification for India to panic. Equilibrium will return albeit once the global market stabilizes.
ARTICLE SOURCE: BS