RBI puts in place $5.5 billion IMD redemption plan

The redemption of $5.5 billion of India Millennium Deposits (IMDs) will result in an outflow of Rs 33,000 crore from the banking system.

The IMDs were mobilised by State Bank of India (SBI) in November 2000 to boost the country's foreign exchange reserves. The total outgo of foreign exchange on December 29, 2005 will be about $7.3 billion, including the cumulative interest of Libor plus 175 basis points.

In a statement, the Reserve Bank of India (RBI) said it has put in place arrangements for redemption of IMDs, in close coordination with SBI.

The entire foreign exchange outgo will be met by the RBI through sale of its foreign exchange reserves to SBI; the rupee consideration will be paid by SBI.

SBI has also taken adequate steps to mobilise rupee resources to purchase foreign exchange from the central bank. When the IMDs were launched, SBI and the Central government had put in place a mechanism called "maintenance of value" account for sharing any loss on account rupee-dollar exchange rate.

SBI is likely to report an exchange gain with the rupee trading around Rs 46.10 per dollar, much higher than Rs 46.65 per dollar at which it sold the IMD proceeds to the RBI in November 2000.

The RBI said, going by the current liquidity conditions in the market, the system should be in a position to take care of the redemption requirements.

It said the eligible market participants can take recourse to the liquidity adjustment facility (LAF) and the second liquidity adjustment facility (SLAF) of the RBI for short-term residual mismatches in the rupee funds position.

The RBI said appropriate arrangements have been made to ensure smooth redemption within the stipulated timeframe to avoid any impact on the money, government securities and foreign exchange markets.