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India To Call On NRIs To Defend Rupee

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With the second-largest diaspora in the world, a community estimated at more than 25 million, the government plans to to call on the NRIs to help reverse a record slide in the rupee, dismissing for now the idea of a global sovereign bond, senior government officials said on Monday, 22 July.

Non-resident Indians (NRIs) already hold more than $100 billion in funds in India. Central bank figures show NRIs held $58 billion in dollar deposits as of September 2012, plus local currency deposits worth 3 trillion rupees.

Acknowledging the country faced a dilemma, the officials said India was running out of options and time to revive the currency and fund a record current account deficit but equally it was wary of sending any distress signals to international markets.

Last week, the RBI's effort to support the rupee by sucking liquidity from the market through a $2 billion bond sale fell short as it accepted just over one-fifth of the bids.

Read Also: Rupee Falters As Govt Rules Out Bonds

The currency's vulnerability was laid bare by the sea-change in global capital flows following speculation that the US Federal Reserve would begin to wind down its money-printing stimulus programme later this year, which convinced investors to pull money out of riskier assets.
While trying to conserve its currency reserves, equivalent to just seven months of imports, the RBI has sought to limit avenues for speculation against the currency, to buy time for Prime Minister Manmohan Singh's government to come up with measures to reduce the external deficits.
A relaxation of rules for foreign direct investment announced on 16 July for several industries, including telecommmunications, failed to give big boost to sentiment.

Some financial market participants had speculated the government would issue an overseas bond to raise foreign money to defend the rupee, which fell to a record low earlier this month, like it did during previous bouts of rupee volatility in 2000 and 1998. The Reserve Bank of India does not support issuing a sovereign bond either, one official said.

"All have agreed that it is not a time for India to issue sovereign bonds at this stage," the official said. "We do not have much options. Whatever has to be done, will be done in the next few weeks," the official said. "We have a window of only few weeks," he said.

The rupee weakened on Monday, 22 July after sources revealed that the government is not considering issuing a sovereign bond to offshore investors right now, dampening hopes for large dollar fund inflows which could have changed the rupee's fortune.

Today's fall in absolute terms is the biggest drop since the rupee's 39 paise decline on July 8, when it plunged to record low of 61.21.

Global Bond Issue May Send Distress Signal

Issuing a global bond might send such a signal, so instead policymakers will focus on attracting funds from Indians living abroad, such as by raising deposit rates in India or issuing bonds specifically designed for them - repeating measures carried out in 1998 and 2000 to steady a weak rupee.

The officials said an increase in central bank policy rates and allowing select firms to raise capital overseas were also being considered.

"All have agreed that it is not a time for India to issue sovereign bonds at this stage," one official said, adding that the central bank agreed with that position too.

"We do not have much options. Whatever has to be done, will be done in the next few weeks," the official said. "We have a window of only few weeks," he said.

"The government could ask banks to raise interest rates to attract an additional $15-20 billion," he said.

The news prompted the 10-year benchmark 7.16 per cent, 2023 bond yield to jump 8 basis points to 8.08 percent, while the rupee ticked lower on the news that a global bond was not being considered right now.

Since the rupee's rapid decline, inflows of money from NRIs have risen, the government official said. The currency traded at around 59.70 per dollar on Monday to be about a percent above its record low of 61.21 hit on July 8.

The rupee has steadied somewhat since the Reserve Bank of India (RBI) took unprecedented steps last week to try to create demand for the currency by aggressively draining cash from money markets and sharply raising short-term interest rates.

Some of the rupee's fall - 12 per cent since May - reflects a broader selloff in emerging markets on signs of a winding down of US stimulus.

But there are also specific fears about India's slowing economy, a lack of substantive reforms and its large current account deficit. That is reflected in foreign fund outflows from India's debt and equity markets since late May of $11.5 billion.

"The government must be weighing the pros and cons of various options available to them, which would be most effective in attracting capital," said Upasna Bhardwaj, economist with ING Vysya Bank in Mumbai. Options include the issuing of NRI bonds and encouraging state-run firms to raise foreign debt, she said.

"If attractive yields are provided, any of these options could be successful."

Huge Diaspora
Chief Economic Adviser Raghuram Rajan told reporters that the government "has not dropped any options" for stabilising the rupee.

India has taken some steps this year to try to attract foreign investment, such as easing registration rules and increasing ownership limits for long-term investors such as sovereign wealth funds.

Measures from the Securities and Exchage Board of India (SEBI) aimed at curtailing speculative positions against the currency gave it some reprieve, but market participants are bracing for a rise in policy rates or other aggressive measures to attract foreign money.

"We understand that we need funds to finance our current account deficit but we do not want to send any signal of panic outside India," a second government official said.

"The rating agencies are already watching us closely, we have to manage the situation in a subtle manner," he said.

The government's first line of defence therefore would be to woo non-resident Indians, sources said.

NRIs lapped up bonds and deposits issued by India in 1998 and 2000, helping bridge massive gaps in India's funding needs. Now, with a current account deficit at a record 4.8 percent of economic output, the country needs all the funding it can get.

The government sources said India could consider raising the repo rate, the central bank's main policy rate, if the rupee falls towards 61-62 to the dollar, citing recent meetings between the government and the RBI.

The government is also considering allowing select companies such as state-run India Infrastructure Finance Co Ltd or IDFC Ltd to raise up to $4 billion in debt abroad, they said.

The first official said state-owned banks are likely to be asked to raise funds from overseas markets to meet their capital needs.

"Even if 5-7 banks raise $1 billion each, it will help us," he said.