India’s Balance of Payments (BoP) for FY27 is expected to end in a deficit for the third year running. To help narrow the gap, the government is believed to be mulling dollar mobilisation schemes for the Indian diaspora. FE takes a look at some of the schemes launched in the past
l Why is there talk of dollar bond issuances?
WITH NO SIGNS that the Iran-US hostilities will end soon, crude oil prices are ruling firmly over the $100 per barrel mark as the Strait of Hormuz remains virtually closed. The rising crude oil bill, coupled with relatively weak exports, could translate into a wider trade deficit and a much bigger current account deficit (CAD) for this fiscal.
Economists now estimate the country’s CAD could widen to over 2% of GDP in the current fiscal, up from 1% in FY26. In addition, capital flows into India too have been relatively weak over the past one year. As such, economists estimate the balance of payments (BoP) will remain in a deficit for the third consecutive year with the gap estimated at close to $68-70 billion, assuming oil prices stay at around $87-88/barrel.
While India does have a forex reserves cachet of close to $700 billion, experts believe attracting dollar bonds and dollar deposits could help narrow the deficit.
l What led to the Resurgent India Bonds issuance in 1998?
THE ASIAN FINANCIAL Crisis of 1997 had gripped much of east and south-east Asia in a regional contagion. Following the nuclear tests by India on May 11, 1998, the US imposed sanctions including the termination of assistance, sales of defence articles and services. The Resurgent India Bonds (RIB), of a tenure of five years, were launched in August, 1998 by State Bank of India and were available for investments by Non-Resident Indians (NRI) and Overseas Corporate Bodies (OCB).
The terms of the issue were attractive and it garnered $4.23 billion in just three weeks. The bonds were denominated in dollars, pound sterling and the deutsche mark and carried interest rates of 7.75%, 8% and 6.25% per annum, respectively. The interest income was free from income, wealth and gift taxes in India. Investors had the option of receiving interest every half year or cumulatively. The RIBs were transferable between NRIs and OCBs, and could be gifted to Indian residents.
l What were the India Millennium Deposits of 2000?
THE SURGE IN crude oil prices in early 2000 drove up India’s import bill and resulted in a fall in foreign assets by about $3 billion with the Reserve Bank of India (RBI) during April-October, 2000. To boost the foreign exchange reserves and impart stability to the BoP, India Millennium Deposits (IMD), of a five-year tenure, were launched by SBI in the October-December quarter of 2000.
The deposits were denominated in dollars, pound sterling and euro and carried interest rates of 8.5%, 7.85% and 6.85% respectively; interest could be paid out annually or cumulatively. A sum of $5.5 billion was mobilised. The government committed to bear the foreign exchange risk beyond 1% per annum on a cumulative basis on the total pool of foreign currency deposits raised via the scheme and also gave tax benefits to deposit holders. The rupee proceeds were utilised to finance infrastructure projects, some for other lending while some was invested in government securities. The redemption entailed an outgo of $7 billion.
l How the FCNR (B) scheme of 2013 raised dollars
IN MID-2013, the ‘taper tantrums’ in the US led to massive capital outflows from India resulting in a steep fall in the rupee following which the RBI announced two special swap windows. First, it offered to swap US dollars raised by banks from foreign currency non-resident (FCNR) deposits of a maturity of three years and more into rupees, at a concessional rate of 3.5% p.a., about 3.0% cheaper than the market. The FCNR (B) deposits needed to be freshly mobilised.
Next, it allowed banks to raise foreign currency funding and swap that into rupees at a concessional rate of 1% below market. Collectively, the two swap windows brought in $34 billion, with $26 billion raised through the FCNR route alone. However, experts point out, only a fraction of the $26 billion was true NRI money, the rest was overseas bank money lent to NRIs, flowing in as NRI deposits. Also, the concessional swap allowed NRIs and banks very high returns at a high (hidden) cost to the country.
l What is being considered now?
ACCORDING TO NEWS reports, schemes similar to the 2013 FCNR (B) and the IMD are being considered. However, economists point out that unlike in 2013, the interest rate on the dollar today is far higher. The current yield on the 10-year US treasury is 4.5-4.6% whereas in 2013 the yields ranged around 1.6%-3%. As experts point out, the returns made by the depositors and the collecting banks were extraordinarily high. By one estimate, adjusting for all subsidies, India effectively raised 3-year dollar money at about 5%, or 4.35% over 3-year US Treasury yields at that time. To be sure, the circumstances at the time were difficult; India was counted among the “Fragile Five”.
Nonetheless, experts say that for such schemes to draw in meaningful dollar sums, the RBI would need to offer banks forex swaps to hedge the currency risk so that they can offer attractive interest rates to depositors or bond-holders.
TOPICSNRIRupee vs us dollarThis article was first uploaded on May twenty, twenty twenty-six, at thirty-nine minutes past nine in the night.