RBI likely to launch $30-35 bn NRI bond in Dec quarter to prop rupee up

The Reserve Bank is likely to issue non-resident bonds worth USD 30-35 billion in the third quarter if the rupee plumbs the 70-mark and if overseas inflows do not revive, says a report.

"We continue to believe that the finance ministry /RBI will issue NRI bonds in the December quarter-- raising USD 30 -35 billion - if the rupee crosses Rs 70 to the dollar without any turnaround in FPI inflows," Bank of America Merrill Lynch said on Tuesday.

It can be recalled that after the rupee hit 68.85 in summer of 2013 following the taper tantrum talks by the US Fed, the RBI was forced to launch the maiden NRI bonds and mopped up $ 30 billion with a three-year matrurity.

It estimates the current account deficit to be jump to 2.4 per cent of GDP in the current fiscal and expects the RBI to sell USD 20 billion to fund that, if FPI inflows continues to remain dry or plungees to zero.

"This will pull down import cover to 9.3 months in FY19 and 8.4 months in FY20 towards the eight months we deem necessary for rupee stability," the American brokerage said.

The report said government bond yields are capped by market expectation of large scale RBI open market operations, about USD 50 billion after October with FPI inflows drying up.

"We expect the RBI to step up OMO to USD 50 billion by March, if FPI flows do not revive, with durable liquidity contracting by USD 10 billion," the report said.

It said our liquidity model forecasts that money markets will slip into deficit in August (Rs 185 billion) and September (Rs 914 billion) updated for end-July data.

According to the report, RBI will have to inject $ 37 billion of reserve money/durable liquidity in FY19 to fund 6 per cent old series GDP growth.