Exclusive: Foreign banks to provide upfront loans for Indian dollar deposits

Tue Sep 17, 2013 12:55am EDT
 
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By Vidya Ranganathan

SINGAPORE (Reuters) - Foreign banks are pushing to raise billions of dollars from expatriate Indians in response to New Delhi's drive to defend its weak currency, which could mean the government can avoid the need for a sovereign bond or state-backed deposit scheme to attract inflows.

The foreign banks are offering upfront financing for wealthy non-resident Indians (NRIs) of 90 percent to set up dollar deposits in India following various central bank incentives, including cheap dollar/rupee swap rates and more relaxed terms on 3-5 year dollar deposits, private banking sources told Reuters.

This would resurrect a practice which proved successful in drawing in dollars from non-resident Indians (NRIs) in 2000, when the rupee was also under pressure. In August, the rupee slumped to a record low close to 69 per dollar as investors fretted over a record current account deficit, hefty fiscal deficit and slowing growth, putting India high on the list of emerging markets vulnerable to any tapering of the U.S. monetary stimulus program.

The banking sources said banks could raise $10 billion or more although Indian government officials said the New Delhi was confident the scheme could raise $15-20 billion. The sources declined to be identified because of the sensitivity of the issue.

"It's a disguised NRI bond because you are basically getting in money locked in for 3 years," said Rajeev Malik, senior economist at CLSA Singapore.

Indeed, Gaurav Kapur, senior economist at Royal Bank of Scotland in Mumbai, noted a sovereign bond would not have been ideal for a government that is running the risk of a rating downgrade from Standard & Poor's, which has a negative outlook on its debt.

In addition, the banking route averts the risk of public embarrassment should a sovereign bond offering not go well, said Gary Greenberg, head of emerging markets at Hermes Fund Managers in London.

"It looks very generous: desperate measures for desperate times," Greenberg said. "I suppose this is a little like war bonds. You do your patriotic duty, except that you are being richly rewarded."   Continued...

 
Raghuram Rajan, newly appointed governor of Reserve Bank of India (RBI), arrives for a news conference at the bank's headquarters in Mumbai September 4, 2013. REUTERS/Danish Siddiqui