The IMD box office hit

The India Millennium Deposit IMD, the third in a series of attempts to boost the country8217;s foreign exchange reserves by borrowing at high cost from Non-Resident Indians, has been a 8220;success8221;. According to what is an unwritten but by now well-known script, the actual amount raised must 8220;exceed expectations8221;. This is because a related purpose of such schemes is to prove doomsayers wrong and to show instead that confidence in the economy is high. One gloomy forecast came from Standard and Poor8217;s when it recently downgraded India. And things have run to script. The State Bank of India SBI, which mobilised funds for the IMD had an original target of 2 billion, later inflated to 4-5 billion. In the event, after extending the deadline for the scheme in order to accommodate Gulf Indian residents, the SBI has raised 5.5 billion according to preliminary estimates and even that figure may be exceeded when the final count is done. SBI8217;s new chairman, Janaki Ballabh, is calling it unprecedented anywhere inthe world for such a sum to be collected in so short a time. That needs to be taken with a pinch of salt but it is obvious he is hugely pleased with the outcome. The intention is to bring all the funds back to India and not park a part abroad as was done in the case of the Resurgent India Bond RIB. With foreign exchange reserves touching 40 billion, the belief is that currency speculators will be put to rout and the governor of the Reserve Bank of India will have fewer sleepless nights.

On the surface, everything looks hunky-dory. However, let it not be forgotten, these are high-cost funds. The coupon rate at 8.5 per cent is well above Libor as well as the 7.75 per cent rate offered on the five-year RIB. Naturally the scheme was a hit with NRIs. They are unlikely to find such a high rate of return plus security plus a shield from exchange rate fluctuations anywhere else. All this has been possible because entities at home in India will bear the cost. This includes the government, which bears most of the exchange rate risk, the SBI and other public sector banks which have to service the scheme and, eventually, the taxpayer. A certain degree of panic must account for the launching of this expensive scheme even though it must be obvious by now to the finance ministry if not to the country at large that the earlier RIB scheme has imposed a heavy burden on the banks and the exchequer.

The relentless rise in international oil prices coming on the back of a markedly weak rupee which responds only for brief periods to the RBI8217;s interventionist tactics is the probable cause of the panic. Another calculation may well have been involved. Had there been more confidence about being able to attract higher levels of foreign direct investment, the government may not have gone in for the IMD, or at least designed a smaller sized scheme. However, since infrastructural and policy obstacles to FDI remain in place, that option has had to be ruled out. Now, flush with foreign currency assets, there is the danger of complacency setting in. This would be completely out of place. Far from proving all is well, schemes like the IMD and the RIB are glaring examples of failures in economic management.