Oil crisis — SBI plans $2-2.5 bn deposit issue

The deposit issue boosted the forex market on Friday. Both the Indian rupee and the government bond market perked up on news that SBI was firming up plans initiated by the government in response to deteriorating external balances. RIBs raised more than $4 billion from non-resident Indians in 1998 after the US sanctions following India’s nuclear tests dried up capital inflows.

Vaidya said the new issue aimed to raise a minimum of $2 billion but its size could be increased to $3 billion if response was good. “There is no reason why the performance of the Resurgent India Bonds cannot be replicated this time. Conditions are much better,” said an analyst.

SBI opted for a deposit rather than a bond issue this time to avoid delays caused by US regulatory requirements. The inflows from the deposit issue will help the rupee stabilise further. The Indian currency hit an all-time low of 46.41 on Wednesday, as global oil prices raced to 10-year highs.

The rupee is still only around six per cent weaker against the dollar than at the start of the year, and on a trade-weighted basis it is holding its ground, due to the sharp declines in European currencies.

Officials reckon India’s oil import bill could come to $22 billion for the fiscal year to March 2001 — up about $10 billion on the year. India’s foreign exchange reserves have fallen close to $3 billion, or eight per cent, from their mid-April peak to stand at $35.36 billion on September 8. For the past few months the Reserve Bank of India has insulated the exchange rate by supplying oil importers with dollars off market to cover some, or all, of their needs.

SBI officials are hopeful of floating the deposit issue in mid-October. He said the coupon rate and the exchange risk for the proposed dollar, euro sterling and yen-denominated deposit issue will be decided next week. Bankers estimated the issue could be priced at 100 to 150 basis points over the US five-year swap rate, now at 6.95 per cent. The rate works out to 8.0-8.50 per cent, they added.

Banking sources said SBI had wanted the government and the RBI to bear the risk, as they had with the RIBs, but this was unlikely to happen. They said SBI could have aimed for a larger issue, of around $4-5 billion, if the RBI bore the exchange rate risk.

The RBI favoured the deposit issue option over any tightening of monetary policy or currency market intervention at this stage. "No further monetary tightening measures are being considered right now," RBI officials said. The RBI is also against scrapping the Exchange Earners Foreign Currency (EEFC) facility — a special account held by exporters abroad, the official said.

The RBI raised short-term interest rates in July and August to support the rupee, and halved the balances under the EEFC account to bring in inflows of around $850 million. The measures appeared to be working until the middle of last week, and the RBI was steadily rolling back the interest rate hikes.

Then it became apparent that an OPEC agreement to increase oil production had failed to bring down prices, raising anxiety about India’s dependence on oil imports. The rupee resumed its fall and the RBI stopped cutting short term rates.

Currency market intervention was unlikely to be effective in the current market conditions, given the dollar’s strength against the main European currencies, the euro and sterling.