Should India go for bond issue to tap NRIs, other overseas investors?

The crucial issue is what should be the interest rate to attract overseas investors, mainly Indians to take part in it

Recently, the new president of the Confederation of Indian Industry (CII) Sanjiv Bajaj urged the government to consider bringing out a special issue of India Millennial Bonds to boost forex reserves. He said India needs to boost its forex reserves to revive the economy, especially in view of the capital outflows by foreign institutional investors (FIIs), prompted by an uncertain global environment.

When asked about the details of the proposal, CII sources said the proposal is based on a broad idea and details will be worked out later.

The last time these bonds were resorted to was in 2000 through India Millennium Deposit (IMDs) Bonds by the State Bank of India (SBI) on behalf of the government. In 2001, $5.5 billion was raised as a result of these bonds. They were of a five-year tenure, aimed at channelising overseas savings, particularly of non-resident Indians (NRIs) into India to stabilise the rupee.

IMDs carried the coupon rate of 8.5 per cent, which was higher than the then prevailing returns for NRIs. These came up for redemption on December 29, 2005. The Reserve Bank of India (RBI) estimated a total outflow of $7.3 bn foreign exchange on the redemption of these bonds.

At that time, RBI, in coordination with SBI made necessary arrangements for the redemption of these bonds so that it did not cause any adverse impact on the money markets. The redemption arrangement was met by RBI by way of direct sale of its foreign exchange reserves to SBI at the then prevailing market rate of Rs. 45.34 against the dollar. The rupee consideration for the sale, which was at around Rs 33,000 crore was paid by SBI to purchase foreign exchange from RBI.

According to the agreement, at the time of the issue of IMD, the exchange loss on account of the depreciation of the rupee is shared between the bank and the government.

Forex reserves were just $38 billion in 1999-00 and $42.3 billion in 2000-01. However, the reserves were enough for import cover for over eight months in 1999-00 and 2000-01. Now, the reserves stood at around $573 billion for the week ended August five. These provide import cover for almost nine months, a bit higher than in 1999-2001.

The average value of the rupee depreciated 2.99 per cent at Rs 43.33 and 5.42 per cent at Rs 45.68 the next year. The average value of the rupee depreciated 5.15 per cent at 77.75 in the first four months of 2022-23 year-on-year.

The issue size of these bonds in terms of value will be a big concern if these bonds are really floated by the government. Last time, $5.2 billion of around $40 billion forex reserves would mean around $80 billion this time, provided other things remain the same. The next crucial issue is what should be the interest rate to attract overseas investors, mainly Indians to take part in it. Rising interest rates worldwide will mean that the coupon rate will have to be quite high.

Meanwhile, RBI has already allowed banks temporarily to raise fresh Foreign Currency Non-Resident Bank FCNR(B) and Non-Resident External (NRE) deposits without reference to the current regulations on interest rates, with effect from July 7 till October 31.

Currently, interest rates on FCNR(B) deposits are subject to ceilings of overnight Alternative Reference Rate (ARR) for the respective currency/ swap plus 250 basis points for deposits of 1-3 year maturity and overnight ARR plus 350 basis points for deposits of 3-5 years maturity. In the case of NRE deposits, interest rates should not be higher than those offered by the banks on comparable domestic rupee term deposits.

Experts have a different take on whether the government should in fact raise this kind of bond issue.

Bank of Baroda Chief Economist Madan Sabnavis said, "I don't think we are in a hard situation to consider such a bond. In an increasing rate scenario, our situation is comfortable and import cover is good. RBI has relaxed norms which will get forex in course of time. In short, these are not needed and any such measure will spook markets that all is not well."

However, India Ratings Chief Economist Devendra Pant said, "You need dollars. Where they come from is immaterial whether they come from RBI measures or India Millennium Bonds. The dollar inflows into the Indian economy is welcome."

When asked if rising interest rates will mean that the coupon rate will have to be quite high, he said challenges always remain.