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By C. R. L. Narasimhan
The Resurgent India Bonds (RIBs) mobilised more than $4billion in August-September 1998. That was twice the amount originally targeted for. The RIBs were issued as a quasi-sovereign debt. The Central Government does not mobilise funds in the international markets through an issue of sovereign paper. The RIBs came very <167,4p,1>close to being that, with even its nomenclature rather loudly proclaiming its role as a country-level instrument. Although in practice it was State Bank of India that handled the mechanics, it was clear that the RIBs had a larger purpose. The Government extended all out support: undertook to share the exchange risks, among others. More importantly it was the perception of it being a government paper that saw the RIB issue sail through with such a massive oversubscription. It is also clear that the Government rather than SBI or any other bank/institution derived the maximum benefit from the RIB issue. Faced with uncertainty in the wake of the post-Pokhran sanctions, the Government had to devise a strategy to rebuild the overseas investor's confidence and shore up its external account. That the Indian diaspora could be counted upon was more than an article of faith. It is a fact that the RIB issue boosted the forex reserves by around 17 per cent. In August 1998 the forex reserves were around $27.76 billion, sizable enough perhaps in relation to the early 1990s but not strong enough to inspire investors. The RIBs thus proved a point but left several others unanswered. Emboldened by its success the Government proceeded to issue another series of bonds — the India Millennium Deposits (IMD) — aimed at the same target audience just two years later. Many lessons will therefore be learnt as the RIB issue moves towards redemption. Will the points raised against the scheme after five years remain valid and haunt those who conceived it? The SBI's top management seems concerned over the consequences of a massive one-shot redemption if every RIB holder chooses to take back in foreign currency. Reports speak of a new banking product with suitable incentives to be made available to the RIB depositors to persuade them to stay invested in the country. If true, such a strategy will reinforce the failings of the earlier one. The favoured treatment to one class — the NRIs — would continue. The discrimination against domestic depositors, who now get a pittance by way of interest will be spectacularly demonstrated yet again. It may not be wholly appropriate to evaluate such a scheme in hindsight. However, it is clear than another RIB type scheme can by no stretch of imagination be advocated today, what with the robust external account and all. More important, did the RIB tide over the financial risks that were all too evident in the first instance? There were three - the exchange risk, the interest rate risk and the risk in not finding adequate deployment avenues. The last has become very important today. Simply stated: were the RIB proceeds (in rupees or any other currency) invested in assets in a way that protects both the adverse exchange and interest rate movements? That question has been periodically asked. Neither SBI authorities nor anyone else has convincingly answered it. On the exchange rate front it was expected that the rupee would depreciate against the dollar but nobody could be sure of the extent. In August 1998 the rupee was around 42.50 to the dollar. At present (despite the recent rupee appreciation) it is a good Rs. 4 cheaper. Hence considerably more dollars will be needed to repay the principal alone even if one ignores the interest payments. A related question: who bears the exchange loss? Again, no answer (so far) even considering that the amounts raked in are huge. That the RIBs will be subject to interest rate risks was well known even at the time of framing the scheme. In dollars, the scheme offered 7.75 per cent way above what similar instruments offered anywhere in the world. (On pound sterling it was 8 per cent). Clearly a miracle ought to have happened since September 1998 if all the RIB money had been invested to yield a higher return. The risk is not only over merely covering the interest cost (and the rather considerable "issue'' expenses) but also covering them over the life span of the RIBs. It is amazing that here again there is so little information. Many other shortcomings of the RIB scheme cited then can be revisited again as the redemption nears. The question is: who gained and who lost? Did SBI, which took much of the credit, have a strategy for countering the obvious risks? If the bank had suffered while implementing a Government policy, how are its independent shareholders to be compensated? At this stage one can only wait for some convincing explanation.
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