The Hindu Business Line : IMD redemption begins from today — Banks get ready with attractive products to woo fresh deposits

Money & Banking - Forex
Industry & Economy - NRIs

IMD redemption begins from today — Banks get ready with attractive products to woo fresh deposits

Our Bureau

Mr K. Ashok Kini, MD, SBI

Mumbai , Dec 28

THE total outgo from foreign exchange reserves for the redemption of the India Millennium Deposits (IMD) would be $7.079 billion, the Reserve Bank of India said in a release today.

So far, the central bank has sold foreign exchange worth $5.107 billion to the State Bank of India, for which SBI has paid Rs 23,044.87 crore. The remaining amount of $1.972 billion would be sold on December 29, which is the date of the IMD redemption, the release added.

The IMD bond was issued in 2000 to increase the foreign exchange reserves. Banks had mobilised $5.5 billion through the issue. The interest rates were 8.5 per cent for US dollar deposits, 7.85 per cent for sterling deposits, and 6.85 per cent for euro deposits, which were higher than normal FCNRB deposits.

SBI has received around 70,000 redemption warrants, said a bank official. Payouts for these warrants are in process.

HSBC, which had participated in the IMD issue and is helping to collect the certificates, also redeemed 3,000-4,000 certificates, said Mr Mansije Mishra, Head (NRI Banking), HSBC.

An SBI official said that 30-40 per cent of the IMD funds are leveraged, which means that they are held by institutions or banks. The rest are held by individual investors and will come back into the Indian banking system through deposit schemes offered by banks or mutual funds.

The banking system has been experiencing tightness in liquidity ahead of the redemption, with the RBI having to infuse huge amounts through the liquidity adjustment facility. Today, the RBI lent Rs 26,685 crore to banks through the repo auction.

However, bankers said that this tightness is temporary and that the money will return to the system once the redemption is over. Banks are prepared for the IMD redemption despite the current shortage in liquidity, said Mr Ashok Kini, Managing Director and Group Executive (National Banking Group), SBI, on the sidelines of a news conference in Mumbai today.

"The liquidity crunch related to IMD was expected. We have planned for it and the system is prepared," he added.

Ahead of the redemption, the RBI intervened on December 27 and bought dollars in the market to infuse rupee into the system, said dealers.

A dealer at a private bank said that SBI had in all probability made arrangements by raising money from short-term T-bills as well as by placing deposits with other banks, with maturity coinciding with the redemption.

Apart from their regular NRE and FCNR deposits, banks in India are offering deposit products through their offshore branches, as they can offer higher returns and thus attract these investors.

"The interest rates on FCNR deposits are determined by the RBI. But abroad we are not driven by regulations and we can offer rates depending on what the market can bear or related to what other banks are offering," said the SBI official.

The bank is offering products through its offshore unit in Bahrain.

HSBC is offering "Premium Deposit" through its Dubai entity, said Mr Mishra.

ICICI Bank is offering a few products through its Singapore unit, said a spokesperson for the bank.

These include a short-term deposit with tenor of 3-6 months and a higher return than the normal NRE deposit and structured deposits.