RIB, RBI & NRI – A PARADIGM SHIFT

August 9, 2003

The gravy train has been stopped in its track; some would say.  It clearly appears now that the Reserve Bank of India (RBI) wishes to sterilize the huge overseas funds flow into the domestic banking system; especially from the NRIs and overseas corporate bodies.  Much of this deluge may have commenced with the Indian Rupee strengthening early this year.  Indeed it would be instructive to establish the precise causes and effects i.e. whether the NRI flows caused the Rupee to strengthen or vice versa or whether the Rupee instead strengthened, on account of pick up in the Indian economy / GDP and the stock market bringing in their wake, both FDIs as well as portfolio investment flows.  Whatever be the reasons, the substantial and steady build-up of foreign exchange reserves to some USD 84 billion has put the RBI in the driver's seat.  It has helped it to introduce convertibility, practically across the board, including both on capital and current accounts.  Given the experience of many of the Asean economies, India is understandably reluctant to go the whole hog.  Politically this issue does not yet have the consensus to back it up to enable RBI to bite the convertibility bullet openly.

However, recent moves by the Reserve Bank reflect a refreshingly new found confidence.  For instance, it has placed a ceiling of 250 basis points over LIBOR / swap rate on NRE Rupee deposits that in one stroke, chocked the NRI surge of money.  The Indian Rupee one-year bank deposits are yielding about 6% p.a.; on which the forward premium was oscillating between 1% and 2%.  Thus a full currency-hedged US Dollar exposure was yielding 4% p.a. against less than 1˝% available on bank deposits internationally; translating into a hefty 2.5% p.a. premium on India's country risk.  India has an impeccable debt service track record of never having defaulted on its overseas domestic borrowings, unlike Russia or Mexico etc. 

With USD 84 billion of FX in the kitty, a paradigm shift was natural and to be expected.  Both the Reserve Bank of India and the Government of India now wish to use the reserves and the clout to repay the more expensive bilateral and multilateral borrowings.  They have been quietly debating the scale and size of such repayments. In fact, they have begun taking action in paying back some debt that were originally contracted at fixed interest rate (5% p.a. etc.) i.e. US Dollar and Japanese Yen-denominated debt that were proving to be costly, as interest rates have declined over the years.  It is also ironic that while India had garnered such large foreign reserves, it is now able to invest them overseas only in low-yielding assets that earn about 1% p.a.  Its overseas borrowings of about USD 100 billion, are therefore easily capable of being refinanced at much lower rates, given the country's credit quality and the global demand for Indian paper. 

The country also wants to shake off its image as an aid-recipient i.e. a nation in need of handouts.  The official announcement that no aid is needed any longer (except on a government-to-government basis from six countries) represents this robust new sense of independence.  It has told some 22 countries such as Sweden, Holland and Canada not to consider any new aid packages in their budgets.  This is a paradigm shift and is a foreign policy move to burnish the erstwhile image of a nation with a begging bowl on Oxfam and other NGO advertisements.  Indeed, India wants to be counted as a significant donor country.  Besides, being irked by aid that comes with strings and sermons, India has a thinly disguised agenda to win a U.S. Security Council seat.  This ambition needs to be cultivated with aid giving and not aid-taking.  In any case, some 60% of the total borrowings is from World Bank and multilateral soft loans.  Hence it is easy for India to disregard and dispense with smaller aid flows in one swoop.  The RBI has chosen to also join the IMF in arranging a pool of lenders to bail out ailing third world nations.

It is in such a changed scenario that NRIs and RIBs feature as issues requiring no sweeteners; as often in the past, i.e. no more sugar-coating.  The Resurgent India Bonds (RIBs), were launched five years ago, when the NRI gravy train was at its peak speed.  The country and its banking system were focused in getting as much overseas and NRI money into its coffers and at any cost.  The RIBs and the subsequent issue of the Indian Millennium Deposits (IMDs), both proved to be expensive propositions for the country.  The then Chairmen of the State Bank of India (SBI) may have taken kudos (one of them upon his imminent retirement) for having raised several billion dollars.  But collecting such amounts by paying such hefty interest rates were not arduous tasks; as they cost the country quite a bit more than what might have been paid (to raise similar money) in the markets.  As the Americans would say, this was a no-brainer !  Banks outside India were, no wonder, prepared to leverage the subscriptions into RIBs and IMDs substantially.  Therefore, belatedly, the stable doors were shut after the horses had bolted away.  These horses are now coming home to roost.

The RBI is under enormous pressures from exporters and industry bodies such as the CII who are finding a non-depreciating rupee a handicap vis-ŕ-vis neighbouring countries.  In certain staple exports such as tea and textiles, a depreciating currency had consistently helped in the past.

The economic press in India also came up with headlines about NRIs taking the country for a ride through speculative arbitrage transactions.  The RBI thus found itself between rock and a hard place.  I understand that the Governor was not keen on putting restrictions on market mechanisms.  But his hands were forced by the frenzy in the media, on the one hand, and the palpable sense of injustice that Indians and industry bodies at home felt, at pampering the NRIs at the expense of exchequer.

Thus the paradigm shift is a combination of healthy self-esteem, helpful economic scenario and domestic pressures.  This started with the software industry making a huge impact on the global psyche.  The Indian professionals (be it the doctor, the accountant, the IT expert, the banker and the academic staff), have gone far and wide in the world and made a name for themselves.  Pulsating through the Indian system, their success has broadened the bureaucratic mindset.  The control structure in the economy got dismantled gradually as market forces were given reasonable rein. With much better regulatory oversight, be it in the telecom, financial or power sectors, the grip of the bureaucrats are loosening up.  The fiscal deficit and the political shenanigans remain the last bastions of power play. 

Nevertheless, some NRIs do feel unhappy that the goodies of yesteryears are being taken away from them, one by one.  A big shock was the removal of the 'not ordinarily resident status' for returning Indians.  That was a body blow below the belt for NRIs; who had relocated to India in recent years.  The Govt. could have opted for a gradual application of this measure, instead of capriciously snatching it away in one shot.

Ultimately, all such measures will always produce injured feelings and some injustice to one section or the other.  Indeed, the losers (NRIs), are not exactly losing their shirts but have merely been asked to get off the gravy train. 

In a sense, they could have been far worse off; especially if a parallel is drawn with the demise of the 'closed economy'.  Indian industry and trade were rooting for freedom from the 'licence and permit raj'.  But when it went in the early 1990s, some businessmen went on to form the famous Bombay Club; protesting at the floodgates of competition let loose and sought some protectionism !  The NRIs are in a similar predicament.  They cannot keep clamouring for preferential high interest rates, if the country no longer needs their money.  Paradigm shift for some and catch 22 for others !

The author is General Manager of Emirates Bank.  However, the views expressed in this article are not necessarily shared by the Bank].

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