Where do the RIBs go?

The State Bank of India might have won the World Cup judging by the mood atits headquarters. There is plenty to crow about in the collections under theResurgent India Bond. By any reckoning, 3.5 to 4 billion is a huge haul,the equivalent of one-seventh of India8217;s foreign exchange reserves, themakings of a rich infrastructure fund the likes of which no Finance Ministerhas seen yet. Yes, it was one of the largest recent mop-ups in internationalmarkets spread across North America, Europe, the Gulf and East Asia. Yes,the biggest marketing exercise of any institution in the history of thecountry is a success. It8217;s one in the eye for Moody8217;s and those who saidIndian paper was getting risky. The doomsayers confounded, conditions forprivate sector borrowing abroad may improve as well. So the SBI should enjoyits moment of glory.

It will be brief. Tomorrow, everyone from the SBI to the Reserve Bank ofIndia to the Finance Ministry must figure out what to do with thisembarrassment of riches. They must find ways of deploying 3.5 billion-plusprofitably so as to be able to service the debt, protect themselves fromlosses and the economy which is in a recession from the inflationary impact.This is easier said than done. The RIBs are high-cost funds whichever wayone looks at them. Investors will bear none of the risks of currencydepreciation. Those will be borne by the SBI, the government and eventuallythe Indian tax-payer. The most optimistic assessment is a five per centannual rate of depreciation of the Indian rupee against the dollar. In realterms, therefore, the cost of servicing the RIBs cumulative interest plusrupee depreciation costs works out to 15 per cent per annum and that iswhere the problems start. There are few avenues today where returns of theorder of 17 to 18 per cent can be expected over a period of five years. Sowhere can the RIBs be deployed to produce the appropriate yields? Roads,ports, power projects which typically have long gestation periods and offerfar lower rates of return are ruled out. The RIBs can shore up foreignexchange reserves up to a point. But the bulk cannot be parked abroad insafe 5.6 per cent US Treasury Bonds, for example, without the governmentsuffering huge losses. Converted into rupees, they create the risk ofmonetary expansion and therefore inflation. Rupee funds can and are beingsucked out of the system by the RBI to avert those outcomes, but these areinterim measures.

Eventually, the funds will have to be invested somewhere. The big questionis where? Banks are already flush with funds but are finding few takers. Ifa profitable answer is not found 8212; and it is difficult to see one in theeconomy just now or in the near future the only justification for the RIBswill be their psychological effects, such as they are, at home and abroad.If that turns out to be all there is, the government is going to have a hardtime explaining to tax-payers that it was worth the cost. But for thepresent prudent investment planning is what is called for.