How NRI bonds helped stem rupee fall in the past

The rupee touched an all-time low of 72.67 against the dollar on Monday and put the government in a tough spot. Since the beginning of the year, the rupee has fallen 13 percent, making it the worst performing Asian currency.

Moneycontrol had first reported that the government may consider opting for overseas borrowing through Non-Resident Indian (NRI) bonds or deposit scheme. Apart from NRI bonds, the Centre and the Reserve Bank of India will take steps to narrow the current account deficit to contain rupee's fall.

NRI bonds are forex deposits raised from non-resident Indians at attractive rates for a period of 3-5 years, with some lock-in and an implicit RBI guarantee. The government floats these bonds to get a foreign pension and institutional funds.

Bank of America Merril Lynch said in a report last week that issuance of NRI bonds could help whip up $30-35 billion in the December quarter.

1998, 2000 and 2013

If the RBI does give nod, it will be the fourth time instance of issuance of bonds to arrest a sliding rupee.

On August 5, 1998, the government floated $5 billion worth of Resurgent India Bond (RIB). This measure was taken after sanctions were put on India following the second round of Pokhran nuclear tests. India ended up raising $4.8 billion through this activity.

The second such bond offer was the India Millennium Deposit (IMD) worth $5 billion, issued in 2000. In 2001, $5.5 billion was raised as a result of these bonds. They were of a five-year tenure, aimed at channelising NRI savings into India to stabilise the rupee.

Foreign currency non-resident deposits (FCNR-B) special deposit worth $34 billion was floated in September 2013 after the rupee hit 68.84-mark against the greenback, following volatility in the markets due to US Fed’s announcement to taper off its bond repurchase programme. The NRI bonds mopped up $30 billion with a three-year maturity.

NRI bonds success story

In all three cases, issuance of NRI bonds has been successful in curbing the rupee fall. Bank of America Merrill Lynch chief economist Indranil Sen Gupta has said that since analysts are now seeing oil prices rising to $72 per barrel in 2018 and $75 in 2019, NRI bonds could be helpful. He said that interest rate defence has only shown partial success in the past.

Bonds have been highly successful among NRIs because they get higher returns than what they would get in overseas banks. Over $27 billion of foreign exchange loans and bonds will mature by March 2019, putting further pressure on the rupee. Interest rate hikes have been the first solution for the rupee, but they cause collateral damage in markets, weakening the foreign portfolio inflows (FPIs).

Foreign portfolio investors (FPIs) were net buyers of equities and debt in 2017. However, they turned net sellers this year with net outflows of around $7 billion up to August 31. India’s forex reserves have dropped from a record high of $426.08 billion in April to $400.1 billion as of August 31.

Analysts argue that a $30-35 billion issuance would help in stabilising the rupee and investors’ perception of it.

Other methods to stem rupee fall

Allowing oil companies to buy dollars through a special window and not in currency markets can ease some pressure on the rupee. The RBI can also offer to buy bonds from oil firms, giving them dollars or other currencies in return that they can use to purchase crude oil from global markets.

Moral Suasion: Sometimes central banks or monetary authorities convince banks and financial institutions to carry out certain acts through non-official persuasion as opposed to official instructions or statutory decree. It’s often described as “suasion” and used to nudge banks to stick to guidelines that are not officially handed out. The RBI can use moral suasion to persuade banks and financial institutions to raise cheaper dollar-denominated funds from overseas markets and then lend these to domestic borrowers in the form of rupee loans.

Another way the RBI can explore is by curbing imports and boosting exports. RBI can decide to make import payments in a staggered to prevent a persistent drain on forex reserves. Higher customs duty on luxury goods and other consumer items will dampen demand and slow down dollar outflow.