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Rukmani Vishwanath

India is still considered a `safe haven' for funds and many NRIs are likely to convert their dollars into rupees, forego forward cover and keep them in the NRE deposits, so that they can still get a better spread.

Mumbai , Sept. 19

THE countdown to the redemption of the Resurgent India Bonds (RIBs) has begun and the nervousness pervading the markets over the past few days is finally showing signs of subsiding.

As the D-day draws closer, the market seems to be forming a new view of stronger rupee post-redemptions, with no significant long-term impact on dollar liquidity.

Meanwhile, despite the RBI having lowered the ceiling on NRE deposits, sources close to the State Bank of India (SBI) confided that the bank still expected to mobilise a sizable amount of NRI deposits.

India is still considered a `safe haven' for funds and many NRIs are likely to convert their dollars into rupees, forego forward cover and keep them in the NRE deposits, so that they can still get a better spread.

"FCNR deposits in the banking system totalled $10 billion as of September, despite the interest rate being unattractive at 25 basis points below LIBOR. Banks are not even actively mobilising these deposits and yet the funds flow in. Similarly, it is expected that a large number of the RIB redemptions will find their way into the NRE coffers," a senior banking source said.

"It is expected that those going in for NRE deposits might decide to go without forward cover so that they get a better interest spread. Some people are betting on the dollar's weakness and the rupee's strength. But it remains to be seen how things unfold," he said.

Another banker said some of the RIB funds might find their way to the deposit schemes offered at the SBI's offshore banking unit, where the interest rate will be higher as RBI's cap on NRE deposits is not applicable.

In this case the funds can always come back into the country, when the OBU lends to Indian corporates.

"RBI has been shouting from the rooftops that there is nothing to worry about and the redemptions will be a smooth affair. So there is no reason for us not to believe them," said a forex dealer with a foreign bank.

"Despite this, market participants will be cautious until the redemptions and there might even be some amount of panic covering for a day or two post-redemption and the rupee might move down by a few paise, but we feel it will be back up to 45.50 levels in no time."

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