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Journalism of Courage
Mumbai, June 7: The centre has decided to bear the exchange risk of the Resurgent India Bonds (RIB) to be issued by the State Bank of India. The government has set $2 billion collection target through the issue of bonds.
Sources in New Delhi said the finance ministry was evolving the mechanism of the risk to be borne on the five-year instrument.
In all likelihood, the centre will bear the exchange risk through the Reserve Bank of India, sources said.
Since the rupee has been depreciating by roughly 5 per cent a year, the centre may end up spending a substantial amount on account of the exchange risk. The central bank had, for instance, booked a loss of over Rs 2,100 crore to bear the exchange risk on the corpus of $2.1-billion India Development Bonds redeemed last year.
"It may not be necessary to spend a huge amount to bear the exchange risk as a substantial chunk of the bond will be rolled over in the form of FCNR(B) deposits.
Non-resident Indians may not be too willing to redeem the entire corpusof the bonds as their global income in subject to tax in advanced countries," sources said.
The State Bank of India will rope in other domestic banks with a global presence — including Bank of India and Bank of Baroda — in selling the bonds at an "attractive" coupon rate.
The road shows for the issue, likely to start once the Finance Bill is passed, may skip the United States, keeping in view the economic sanctions clamped on New Delhi by the Clinton administration.
The bonds will be denominated in three currencies — dollar, pound sterling and deutsche mark.
"The government is keen on offering a coupon of about 200 basis points over the yield of US treasury of a comparable maturity. At present, five-year US treasury bills offer an yield of 5.55 per cent. Taking into account the transaction cost, State Bank’s cost of the bond fund will work to at least 7.75 per cent," sources said.
Despite this, the bond will offer a lower yield than that of the India Development Bonds, which carried coupon of 9per cent (50 basis points over the three-year FCNR(B) deposit prevailing on the opening date of the issue). The current three-year FCNR(B) interest rate offered by State Bank is 5.5 per cent.
According to sources, the central bank is likely to buy dollars, pound sterling and deutsche mark from State Bank at a notional rate (the spot rate on the day of purchase). The difference in the exchange rate between the day of buying and the day of redemption of the bond will be made good by the central bank from its exchange-equalisation account."The exact mechanism is being worked out," sources said.
The five-year instrument will be fully repatriable. The objective is to lower the country’s short-term forex liability.
"The choice was between raising the maturity of FCNR(B) deposits from three to five years or introduce a new instrument to attract NRI funds. The finance ministry opted for the second. It will have the features of FCNR(B) deposits as well as that of external commercial borrowings," sources said.
