The Hindu : Resurgent India Bonds - more than the mechanics

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Saturday, Oct 04, 2003

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Resurgent India Bonds - more than the mechanics

By C. R. L. Narasimhan

Not just the mechanics of the RIB repayment, but also a detailed exposition of its costs and benefits will help in allaying apprehensions.

The news that the massive size of the RIB (Resurgent India Bonds) redemptions notwithstanding the domestic money and securities markets as well as the forex markets remained substantially unaffected is good insofar as it goes. Quite obviously the credit, if any, for the smooth repayment of the $5.185 billion (Rs. 22, 151 crores) bonds should go to the vastly improved macro economy, whose fundamentals bear only a remote resemblance to what they were five years ago. Talking of the external economy especially, the current level of forex reserves at $87 billion plus is more than thrice what it was in August 1998 (the date of the RIB launch). More significant has been the change in the sentiment affecting the external economy.

Five years ago, the sanctions imposed in the wake of the Pokhran II blasts had taken a toll. Today in the matter of reserves there is an embarrassment of riches. The debate is, in fact, over previously unthinkable matters such as utilising the hoard "more profitably'' or in determining the correct level of reserves. It might be preposterous to claim that the RIB issue, by itself, brought about a dramatic transformation in the sentiment that eventually got converted into the healthy external sector of today but it was an attempt in that direction. Targeting the non-resident Indians (NRIs) exclusively, the RIBs have been akin to a sovereign borrowing (India has none). Its success in one major sense — a mobilisation of more than twice what was budgeted for — had led to some untenable claims, however. Chiefly, there has been no attempt all these five years to impart a measure of transparency to the RIB issue.

Clearly the implications of such a large borrowing affect the country at large. If the RIB issue is to be pronounced a success in terms of the large sums it garnered, it should also simultaneously be evaluated against the usual common sense parameters that concern even lay citizens. Did the RIBs pay too much by way of interest? At 7.75 per cent on the dollar denominated bonds (the most popular, the offering was at least 3 per cent above comparable offerings at that time. Did the NRIs require such extraordinary incentives? There was also the accompanying guarantee of repatriation, which means that they were fully protected from exchange rate fluctuations. Concessions of that magnitude obviously mean some one else has to bear the burden.

The pitfalls in the RIB mobilisation strategy have been well documented. The need to be re-examined today on the basis of more transparent data than what has been given to the press on October 1. Of the latter, both RBI and SBI can justifiably claim credit for the smooth repayment. But then those are the mechanics, whose details however necessary and interesting are not a substitute for a convincing answer to some of the nagging worries of the RIB issue. It is hoped that SBI in particular furnishes details of its risk containment stategy. Did it really get to use all these funds profitably without "a mismatch?'' The exchange risk inherent in the RIB issue has been shared with the RBI.

In August 1998 the rupee was Rs. 42.50 to the dollar. Despite its recent gains it is still three rupees cheaper today.

There has been an exchange loss, which will have to be quantified no matter who bears it. Again, at the time of the RIB issue the then Chairman of SBI, M. S. Verma, had claimed that there were enough avenues for deploying the RIB funds including in large infrastructure projects. Evidently such hopes have been premature. Will the SBI give more details?

Another related area has seen a dramatic change. The NRIs so much at the receiving end of the Government's munificence at the time of the RIB issue are getting considerably less at the time when they getting the proceeds back. Interest on NRI deposits has been severely curtailed. Overseas corporate bodies that channelled such large NRI money will not count anymore. Have the new rules come about as a consequence of the lessons learnt from the RIB issue?

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