Tapping India’s diaspora to salvage rupee
What will save the Indian rupee? There’s an election next year so forget about the stuff that’s really needed — structural reforms to labour and tax laws, easing business regulations and scrapping inefficient subsidies. The quickest and most effective short-term option may be a dollar bond issued to the Indian diaspora overseas which could boost central bank coffers about $20 billion.
The option was mooted a month ago when the rupee’s slide started to get into panic territory but many Indian policymakers are not so keen on the idea
So what are the merits of a diaspora bond (or NRI bond as it’s known in India)?
Bankers reckon India could raise a substantial sum relatively cheaply — there are millions of overseas-based folk of Indian origin (including yours truly) and many of them would probably be happy to commit five-year cash for yields around 6- 7 percent.
Indranil Sengupta, India economist at Bank of America/Merrill Lynch reckons that a $20 billion instant addition to the RBI reserves would sooth markets which deem India’s current reserve cover of 7 months as too little for comfort (of the other BRICs, Brazil has 20 months import cover, Russia 17 months and China 22 months). Sengupta writes
Markets will only get increasingly nervous till the import cover reverts to the 8-10 months critical for stability in our view. In the past five years, it has halved to seven months, trailing BRIC levels
And it’s not only about import cover. The years since the 2008 crisis saw vast numbers of Indian companies borrowing overseas in dollars. The central bank’s steadily dwindling coffers mean that reserves currently are 2.1 times short-term external debt, BofA/ML data shows. Compare that to 3.2 times in Brazil and 6 times in Russia. Just before the crisis, India’s reserves/short-term debt ratio was almost 4.
But Indian officials are still divided over the NRI bond, Finance Secretary Arvind Mayaram being the latest to oppose it. He said this week he expected foreign capital inflows to resume in a couple of months. His optimism is probably misplaced — the rupee continues to slide, hitting 64 per dollar for the first time ever. Foreigners have already pulled out $11.5 billion from Indian debt and equity markets since end-May.
That’s the downside. Taking on a dollar-denominated liability back in 2000 (the last time India issued a diaspora bond) was one thing. Back then the economy’s prospects were relatively bright. Now with the greenback on the rampage and Indian growth heading lower, the risks of taking on a big dollar-denominated liability are bigger.