<div>The mercurial rupee has been keeping the government on its toes. Considering all short- and long-term options, the Reserve Bank of India has been taking a series of measures to keep the rupee in line. The latest came on Tuesday, 23 July. The RBI set the overall limit for borrowing under the daily liquidity adjustment facility (LAF) for each bank at 0.5 per cent of deposits, outstanding as of the last Friday of the reporting cycle two weeks prior to the current one.<br /><br />The central bank also said banks need to maintain 99 per cent of their daily cash reserve ratio requirements with the RBI, as against 70 per cent now. The measures could suck out Rs 4,000-Rs 5,000 crore from the system.<br /><br />RBI also capped the borrowing limit for an individual standalone primary dealer under the central bank's daily repo window at 100 percent of net owned funds from July 24. The cap, part of a series of measures to drain liquidity and prop up a falling rupee, will also apply on reporting Fridays of the two-weekly cycle, when the RBI conducts two repo auctions, it said in a release on Tuesday.<br /><br />While various short-term market steps have not been very successful so far, the government has been contemplating enticing the estimated 25 million NRIs to invest in rupee-denominated bonds or deposits which any way is likely to demand big risk premium to support the rupee. <br /><br />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. On 23 July, the apex bank failed to receive any bids at its second consecutive special repo auction for mutual funds. The central bank is offering the special repo facility at the Marginal Standing Facility (MSF) interest rate of 10.25 per cent. Last week, the RBI had said it would offer a total of Rs 25,000 crore to banks for funding mutual funds through a special repo window to meet their liquidity needs.<br /><br /><span style="color: rgb(128, 0, 0);"><strong>Read Also</strong></span><strong>: <a href="http://www.businessworld.in/en/storypage/-/bw/rbi-takes-more-steps-to-tighten-liquidity-help-rupee/r999520.16628/page/0">RBI Takes More Steps To Tighten Liquidity</a></strong><br /><span style="color: rgb(128, 0, 0);"><strong>Read Also:</strong></span><strong> <a href="http://www.businessworld.in/en/storypage/-/bw/india-to-call-on-nris-to-defend-rupee/r997031.37467/page/0">India To Call On NRIs To Defend Rupee</a></strong><br /><br />On 22 July, talking to news agency Reuters, government officials said it was considering tapping the 25-million strong Indian diaspora to help reverse the rupee decline. 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. <br /><br />New Delhi is considering the time-tested recipe of raising money from non-resident Indians (NRIs) via debt or deposits. The government said all options to support the rupee are on the table, although the sources said tapping NRIs was considered a better option at this time than issuing a sovereign bond.<br /><strong><br />How To Foot The Dollar Bill?</strong><br />However, tapping the NRIs may not be such a cakewalk. The NRIs are patriotic up to a point. In fact their patriotism may amount to 5 or 6 percentage points of annual investment returns when it comes to providing the hard currency needed to revive the rupee.<br /><br />"The government may not get terms as favourable as they might like but the cost of borrowing would be lower than onshore, and that's an incentive," said Philip McNicholas, BNP Paribas economist in Hong Kong.<br /><br />"An NRI bond issue could be a quick and easy way to raise dollars as it may face less political push-back and you are tugging at the heartstrings of the diaspora," he said.<br /><br />Bankers and analysts estimate the government will have to pay between 5 per cent and 6 per cent on domestic dollar deposits for a 5-year period if it wants to lure overseas Indian money.<br /><br />"The sweetest of the sweet spot will be five years and 5 per cent," said a private banker with a Swiss Bank in Hong Kong, whose clients include NRIs.<br /><br />At 5 per cent, that would be at least 370 basis points over benchmark US treasuries, higher than the returns on bonds and deposits in 1998 and 2000 — the last time India tapped its diaspora to support a weakening currency — of about 250 basis points over US treasuries.<br /><br />"The economy had better prospects in the 1990s," said a non-resident Indian banker in Singapore. "The services sector was opening up too then."<br /><br />Now, weak foreign direct investment and a record current account deficit suggested investors would demand a premium to part with their money.<br /><br />"How will India fund its dollar bill?" he said. <br /><br />Those risks and the uncertainty of a general election due by 2014 also suggested NRIs will be reluctant to commit funds beyond five years, the bankers and analysts said.<br /><br />It may be tougher to entice the NRIs to invest in rupee-denominated bonds or deposits because they will carry the currency risk.<br /><br />The rupee has fallen close to 8 per cent against the dollar so far this year, second only to the Japanese yen in rankings of the weakest currencies in Asia monitored daily by Reuters. It hit a record low of 61.21 on July 8 and was trading on Tuesday around 59.75.<br /><br />While some investors may be attracted by the prospect of capital appreciation in the record-low rupee, coming on top of an attractive coupon yield, some are not convinced the currency will not weaken further.<br /><br />"Even at a 12 per cent interest rate, they won't find anyone willing to buy rupee bonds," said the Indian banker based in Singapore.<br /><br />That would be at least 300 basis points over the rate banks currently offer on non-resident rupee deposits and compares with an 8.5 percent yield on five-year government bonds.<br /><br /><strong>A Time-tested Ploy<br /></strong>In the midst of a balance-of-payments crisis in 1991, India used a tax-forgiveness plan for NRIs to get them to bring money home.<br /><br />In 1998, it issued a five-year Resurgent India Bond offering 7.75 per cent in dollar terms, raising more than $4 billion.<br /><br />In 2000, it raised $5.5 billion through an India Millennium Deposit scheme, which paid 8.5 per cent for 5-year dollars.<br /><br />Wealthier investors may need more sweeteners, such as the ability to leverage the investment by say four times, the private banker said. That would imply an enhanced yield of 13-14 per cent on a dollar deposit.<br /><br />The current account deficit amounted to $87.8 billion in the financial year to March 31, a record 4.8 per cent of GDP. Although one government source said on Monday the government could try to raise as much as $20 billion via NRIs, bankers said such a target would be tough to reach.<br /><br />"It is ambitious," said Abraham Chacko, executive director at Federal Bank, a private-sector bank in India with assets of $12 billion.<br /><br />"We (India) get about $60 billion a year, so talking about $20 billion now is ambitious. But it will be higher than in the previous years."<br /><br />(BW Online Bureau & Reuters)<br /> </div>
