Mumbai, Aug 20: The Reserve Bank of India will strike the first off-market deal with the State Bank of India on Friday to buy $250 million, the first tranche of the Resurgent India Bond proceeds.Sources close to the State Bank said it would be an outright sell based on the prevailing spot rate. The foreign currency proceeds' arrival is expected to cool the foreign-exchange market which witnessed extreme volatility on Thursday.The State Bank is expected to sell over 80 per cent of the total resurgent bond proceeds to the Reserve Bank, as the bank is finding it difficult to perk the funds abroad profitably. This will enhance domestic liquidity.State Bank's foreign branches have reportedly informed the headquarters that it would not be an easy task to deploy the high-cost funds in the overseas market without compromising on assets' quality.
"Resurgent bonds funds will be sold to the central bank in tranches. Since the issue is closing on August 24, State Bank will be able to complete all transactions by the month-end. The first deal will be struck on Friday," sources said.
As on August 19, the bank has mopped up $3.1 billion through the multi-currency five-year instrument. "Over $2.5 billion will be brought to the market through outright sale deals over the next 10 days. This will sufficiently cool the market," sources said.
According to the arrangement, the State Bank will outright sell the dollars at the market rate on spot basis and purchase the same amount from the market five years later to redeem the bonds. The centre will bear the exchange-rate differential to the extent of 99 per cent, while the State Bank will bear the rest.
In case of the India Development Bond,SBI had sold dollars to the RBI at a "nominal" rate and repurchased it at the same rate five years later as the exchange rate was frozen and the entire risk was borne by the central bank.The decision to strike "off-market" deals was taken so that forward premium rates are not disturbed and the spot rupee does not appreciate. "There is no question of entering into swaps -- long or short -- and rolling them over for five years. The forex market is volatile now, and we will not attempt to disturbe it further," a source handling then Resurgent Bondissue said.
The first deal (of $250 million) will offer a psychological cushion to the forex market and at the same time the there will be surfeit of liquidity.
Anticipating this, the Reserve Bank of India has alrady hiked the cash reserve ratio which will suck out Rs 5000 crore from the system and embarked on an aggressive sterilisation exercise through open market operations.
Sterilisation is a process through which the Reserve Bank offloads government securities in its portfolio in the market and siphons off rupee funds. This is a necessity as every purchase of the dollar from the State Bank of India will bring in a fresh flow of rupees into the financial system. The short term repo window is also an instrument of sterilisation.
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