Time to go nuclear on Rupee with $ bonds

As rupee rumours go, this one’s tantalising in terms of promise.On Forex Street, it’s also called the nuclear option and denizens are of the view it’s time for the Reserve Bank of India (RBI) to exercise it.

And how can the RBI nuke the rupee shorters?

This will take a couple of steps.

The first is to announce a sovereign bond – call it India Resurgence Bond or whatever – for around $20 billion or more, offering better than the best rate of 9.5% available on NRI deposits, with a lock-in of 5 years.

In these times of zero equity returns, that can promise an investor stampede.

Second, keep selling dollars in the market to take out excessive “long dollar” positions and, “simultaneously, announce Rs 1 lakh crore of open market operations, bond purchases to absorb resultant rupee liquidity squeeze in the system,” suggests Moses Harding of IndusInd Bank.

That should will help the rupee to gain sharply and reach 52/$ range, say marketmen.

“The Indian currency will then get into consolidation mode at 52-53, which is considered as fair value factoring in extended dollar rally against global currencies,” said Harding.

Considering that banking systems abroad are fragile with runs becoming routine, unaccounted Indian money can also find a safe harbour, said an analyst, tongue firmly in cheek.

But Chakravarti Rangarajan, former RBI governor and economic advisor to the Prime Minister says sovereign bonds are good option that can be considered, but not when the outlook on the rupee is weak, “because that’s also factored into the calculations.”“The timing of the bond issue is crucial,” Rangarajan told CNBC TV18.

It’s not that the government doesn’t have experience in issuing the bonds.

The government had allowed the State Bank of India to launch India Millenium Deposit scheme, which attracted huge interest from non-resident Indian (NRI) investors. These five-year dollar bonds had helped raise $5.5 billion at an interest rate of 8.5% and the proceeds were used to finance infrastructure projects at that time.

The RBI opening up the direct window for oil companies to borrow dollars through its reserves seems to be the next best measure being suggested.

This will help in removing a huge section of the demand from the forex market, easing it further, experts said. But then such a measure will only ease the demand pressure for a short duration, since the RBI’s reserves are limited.

“This will provide the government with a window of opportunity big enough to get the ground work for a sovereign bond issue in place. For a long-lasting measure, a short term measure is necessary,” said Priyanka Kishore, forex strategist, Standard Chartered Bank.

But Anindya Banerjee, currency derivatives research desk, Kotak Securities, believes that till the policy situation improves at the Centre, there is little hope for the rupee.

“If there is stability of policies on ground, there will be more avenues for inflows to happen. That will lead to more meaningful impact on currency than any ad hoc measures."