Our level of forex reserves is comfortable. Nevertheless, export growth has been very slow, foreign institutional investors are selling assets, and foreign capital inflows will be affected as a result of the sanctions. In the circumstances, the Resurgent India Bonds are expected to plug the gap.

The State Bank of India says that its pre-marketing surveys show a very healthy demand for the bond. The rate of interest is attractive, but has to be viewed in the context of Indian dollar-denominated bonds currently being traded at four to five hundred basis points over Libor. Seen in that light, the Resurgent India Bonds will be a comparatively cheap way of garnering foreign money in today's external environment.

Having said that, it mustalso be remembered that it is the Indian taxpayer who will have to bear a major part of the exchange risk. Even if we add a conservative 7 per cent annual depreciation in the value of the rupee, the cost of the bonds amounts to over 15 per cent after taking expenses into account. The rates of interest to be charged on infrastructure loans will be lower than that, which means that an implicit interest rate subsidy will be given for investment in infrastructure. In reality, not all the proceeds will be utilised in infrastructure. Given the lack of pick-up in credit, much of the money will in all likelihood find its way into government securities. This is because the problem in infrastructure funding is not really the supply of funds, but rather the lack of projects taking off. The key to the success of the Resurgent India Bond programme, therefore, lies in the way the funds are utilised.

If the money is used to give a big push to infrastructure projects, this could set off a virtuous circle whereby newinvestment would be drawn in, and this in turn would induce foreign capital to flow in. The breathing space which would be available to the government as a result of the bond issue should also be used to put into place policies which create the right environment for foreign investment. It needs to be remembered that the India Development Bond experiment succeeded because when it was introduced, reserves were at their nadir, and when they were repaid reserves stood at over $25 billion.