Shoring up reserves: Amnesty scheme, a hope

The RBI is doing the best it can in the circumstances — increasing the cost of speculative selling of the rupee.

Some well-timed pre-emptive dollar selling to burn deep holes in rupee short-market players would also take the heat off — for some time.

The sharp rise of the Indian currency in the last couple of days is obviously because of short-covering. After this is over, we are back to square one. For, there is a fundamental dollar demand-supply imbalance in the market. The rupee’s fall — even a crash — will continue if the RBI decides to hoard its reserves for the rainy day.

The Finance Minister’s hurried trips abroad to attract ‘hot’ money seem to have failed. What tricks (for we can’t think beyond) does the Government have up its sleeve? Of course, in the short-term, borrowing is the only way out. But are there willing lenders?

The IMF and the World Bank can be straightaway ruled out. Their resources are puny compared to our needs of something like $100 billion.

The Government is exploring a sovereign bond issue, never done so far. (Pride comes before a fall — not too long ago we were speaking of a sovereign wealth fund to invest overseas). There have been preliminary meetings but apparently no great enthusiasm on the part of potential investors. India’s country risk index has shot up in recent weeks.

Latest reports talk of ‘appealing’ to the patriotism of non-resident Indians. Do they have $100 billion to spare? Earlier, NRI bond issues were small change — around $10 billion.

Two options

So we are left with two options on the money-raising front — and the Finance Minister is very familiar with one of them: an amnesty scheme.

There is a precedent allowing NRI investment in amnesty bonds, no questions asked. Investors could collect maturity proceeds in dollars or rupees, as they wanted.

The difference between a ‘patriotic’ Diaspora-targeted bond issue and an amnesty scheme is in the amount of money that can be raised — the sums we are looking for are undoubtedly only in the latter.

Will the ‘sharks’ bite? Probably, if the terms are attractive enough and the Government can reach an ‘understanding’ with all political parties that amnesty legislation will not be revoked. Should be easy, but for those recalcitrant Communists, who, thankfully, are unelectable. A pretty high rupee interest rate of even as high as 12 per cent could be offered for non-repatriable funds. After all, that’s the opportunity cost of scarce dollars today.

The second option is more difficult and sensitive: put together a consortium of reserve-rich countries to bail us out. They are well-known: Japan, Germany, Singapore, Norway, and so on — it’s easy to compile a list. Dollar 25 billion for each is peanuts. But the price could be high.

The only buffer we have is food production and stocks. Luckily, Government can’t mess up nature’s gift.

(The author is a Chennai-based financial consultant.)

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