The triple-currency five-year instrument, floated in August by the State Bank of India, mopped up $4.18 billion from non-resident Indians and overseas corporate bodies. However, the MOV account will cover $3.6 billion of the Resurgent Bond proceeds--the amount which the State Bank has sold to the central bank. Under the arrangement--chalked out by the RBI in consultation with the government--the State Bank and the centre will contribute to the account every year to make good the exchange loss on account of rupee depreciation.

The State Bank will bear the exchange loss to the extent of 1 per cent per annum on the rupee equivalent of the principal amount sold to the RBI and the interest thereon, while the centre will issue non-negotiable, non-interest bearing special securities without specified maturity in favour of thecentral bank. The proceeds of the securities will be deposited in the account.

The scheme will terminate at the end of September 2003. However, a period of six months ending March 2004 will be allowed for final settlement of the accounts.During the operation of the scheme, there will be an increase in the Reserve Bank's net credit to the government to the extent of the central bank's investments in non-negotiable securities issued by the centre towards its contribution to the MOV account. However, this is not monetised deficit and will not have bearing on money supply, reserve money or currency in circulation.

The creation of the MOV account will also neutralise the impact of the exchange loss on the Union budget as the government's payments will be offset by receipts against the issue of securities. However, the fiscal deficit will go up on account of depreciation of the rupee. Senior analysts said the arrangement is typical of any repayment of balance of payment (BoP) support loans like InternationalMonetary Fund or World Bank loans.

"This is an accounting procedure. Any increase in net bank credit to the centre as a result of the RBI's purchase of gilts will be offset by identical increase in net non-monetary liabilities of the Reserve Bank," a senior analyst said.

An increase in non-monetary liablities has a contractionary effect on money supply.

"By creating this vehicle, the RBI has decided to revalue the RIB corpus every year and mark to market the portfolio annually, thereby, creating a staggered effect on the exchange loss. Otherwise, the government and State Bank would have ended up taking a big hit at the end of five years," analysts said.

Post March 2004, the Reserve Bank may decide to keep the government securities in perpetuity or redeem them in marketable lots on the line of the ad hoc treasury bills.

"They can form part of special securities already in place which will be phased out in time," analysts said.

The Reserve Bank has clarified that the MOV arrangement is restricted tothe transactions among the government, the RBI and the SBI in respect of the RIB scheme. All foreign currency sales by RBI in the market will be dictated by the market rates and local forex buyers will not be entitled to any exchange-rate protection, an RBI release said on Monday.

INSIGHT
Loss of accounting entry

The "maintenance of value" account proposed by the centre is essentially a periodic marking of the RIBs to market. At the end of September every year, the exchange loss/gain will be worked out and the loss will be funded by SBI and the government. For SBI, the exchange depreciation loss will be a cash outgo, but the government will not set aside cash but instead issuenon-negotiable, non-interest bearing securities. In other words, for the government, the exchange loss will be basically an accounting entry. Since the special securities cannot be sold, they are in the nature of IOUs.

State Bank to take Rs 850cr hit

The creation of RIB-MOV account will set back the StateBank of India by a good Rs 850 crore at the end of five years. This effectively means that the SBI will contribute Rs 170 crore (1 per cent of Rs 17,000 crore) every year on account of rupee depreciation to the account. With this, the earlier notion that the centre will take 99 per cent of the rupee deprecitation and the SBI a mere 1 percentage point has undergone a change. This also effectively revises the profit estimate that State Bank is expected to generate out of the RIBs as the spread on the deployment of the resurgent bond corpus will shrink following the 1 per cent exchange risk.