Rupee rescue: Is RBI now gearing up for gold bonds?

Saikat Das
Moneycontrol.com

Speculation in the currency market is that the Reserve Bank of India (RBI) may issue government gold bonds to attract dollar inflows and stabilize the rupee which is in danger of slipping to a record low.

Earlier in the day, the RBI tightened rules for exporters, asking them to convert 50% of their dollar holdings into rupee and to access the forex market only after using up their existing balance.

"There is strong talk that RBI may issue sovereign gold bonds with interest rate in the range of 7-8%," a market participant with a private sector bank told Moneycontrol.com on condition of anonymity.

"Gold bonds would be issued to both resident and non-resident Indians against deposit of gold. Source (of gold) will not be questioned. Simple tax could be levied at the rate of 15%. Tenure is likely to be 10 years. Gold collected will be pledged with foreign lenders and funds will be availed at 3 to 4%. The proceeds are likely to be used in infrastructure sector."

This news could not be confirmed, although a few currency dealers are endorsing the concept. A senior RBI official told Moneycontrol.com that gold bonds is one of the options.

"An issuance of gold bonds will definitely provide a breather for the rupee," said Satyajit Kanjilal, CEO, Forexserve advocating the cause for gold bonds.

The weakness in the rupee can be attributed to a combination of domestic and global factors. Back home, a widening trade deficit (exports minus imports) and less foreign capital flows have made it difficult for the central bank to support the rupee through direct sale of dollars. At the same time, the problems in Eurozone is prompting many investors to seek refuge in the dollar, even though the US economy too is in the midst of a slowdown.

Earlier, many expected rupee to touch 57 against the U.S dollar. The latest RBI measure may have led to some dilution of that target.

"RBI measures did help in reviving market sentiment," said Pramit Brahmbhatt, CEO, Alpari India, a currency brokerage firm.

"All RBI measures are short term in nature and aimed at curbing speculation. It will not hurt genuine buyers and sellers in the market.  Many exporters were holding dollar in their EEFC account hoping to book higher profits as and when rupee depreciates further. This will not be a reality now. I expect rupee trading in the range of 52.80-54.20 in the short term," he said.

Also read: RBI to exporters: Convert 50% dollar holdings into rupee

The latest measure on exporters is likely to create around 2.5 billion dollar inflows in next 14/15 days arresting some free fall of the local currency. EEFC is an account maintained in foreign currency with an authorised dealer i.e. a bank dealing in foreign exchange.

The Indian rupee on Thursday closed at 53.43 against a US dollar after hitting intra-day low at 53.90. The day's high was at Rs 52.97/$.

saikat.das@network18online.com