Iran curbs, Federal Reserve meet outcome to decide intricacies of NRI bonds

Two events in early November — the full impact of the United States’ sanctions on Iran and the US Federal Reserve meeting — will decide the shape, amount and contours of Non-Resident Indian (NRI) bonds Indian banks will issue to attract dollar deposits.
 
Business Standard has learnt the Reserve Bank of India (RBI) and the government are in the final stages of discussions regarding NRI bonds. The urgency for such instruments is less now than it was in September and early October, when the rupee was in a constant free fall against the dollar.
 
The local currency touched a lifetime low of 74.39 against the dollar on October 9. Since early September, it has been breaching lifetime lows almost daily. On Wednesday, the rupee opened at 73.15 against the dollar.

 
“There have been deliberations on NRI bonds since the rupee’s latest slide began. They have always been one of the options on the table,” said an official aware of the discussions. “There is no fixed timeline for announcing such a scheme. We are watching the key events over the coming weeks,” the person said.
 
Sources said some matters were being finalised. One is whether the latest scheme will be similar to the Resurgent India Bonds/India Millennium Deposits, issued in the late 1990s and early 2000s, or the Foreign Currency Non-Repatriable Account deposits of 2013. Sources say discussions held so far between the government and RBI favour the latter.
 
The Resurgent India Bonds were floated by the government in 1998 and issued by State Bank of India (SBI). In 2000 the India Millennium Deposits (IMDs) were floated by the Centre and issued by SBI. Both were aimed at channelising the savings of NRIs. And both raised about $5 billion.

 

Foreign Currency Non-Resident Deposits (FCNR-B) worth $34 billion were floated in September 2013 by the Manmohan Singh government after the rupee hit 68.84 against the dollar. They were open to all banks and mopped up $30 billion with a three-year maturity. The banks were provided a window to hedge against the rupee’s movements.
 
“With something like FCNR(B) you can do it very quickly whereas if you launch an NRI bond, it may require further legwork. My opinion is that the government should not rush into this and keep it as a last option. It is better that the government does the groundwork and announces it if needed,” said B Prasanna of ICICI Bank.
 
Officials say now two key events will steer the government’s decision on the issuance, size and tenor of the bonds.
 
US President Donald Trump’s administration is pressing allies and friendly nations to end imports of Iranian oil by November 4 and doesn’t want to offer any extension or waiver. The desire to slash Iranian oil exports comes as Washington follows through on Trump’s decision in May to quit the Iran nuclear deal of 2015.

 
On November 7 and 8, the US Fed’s Federal Open Market Committee (FOMC) holds its next meeting. The Fed is broadly expected to continue raising rates gradually. In its September meeting, it raised key interest rates by 0.25 per cent.
 
What remains to be seen, however, is whether there is any appetite in the markets for such instruments targeting NRIs. “It depends on how attractively you price it. Now probably you will have to offer a higher dollar rate than in 2013. You also have to make it profitable for banks. Which means that the swap facilities that the RBI is giving have to be attractive as the interest rate differential has narrowed,” Prasanna said.