Barring the adverse impact of external debt service burden of $7.4 billion to $7.5 billion in 2005-06 on an estimated $5.5 billion raised through IMD issue, on country's external debt burden, IMD inflows would be largely positive for the economy, Crisil said in a latest study.

"Some portfolio readjustment away from FCNR (B) deposits and towards the IMD scheme (due to the interest differential between the two) is expected but on the whole, the inflows will bolster foreign exchange reserves," it said adding this would improve market sentiments, resulting in relative stability of the rupee/dollar during the second half of the current fiscal.

The IMD Issue, estimated to have raised $5.5 billion, offered an interest of 8.5 per cent on dollar deposits, 6.85 per cent on Euro deposits and 7.85 per cent on pound sterling deposits.

Since nearly 90 per cent to 95 per cent of the total collections are estimated to be cumulative deposits, the interest payment on these would be back-ended, implying an estimated interest repayment of around $1.9 billion to $2 billion besides the $5.5 billion principal in 2005-06, Crisil said.

Crisil said IMD inflows would result in a sharp increase domestic liquidity. At current exchange rate of Rs 46.74 to a dollar, $5.5 billion inflows imply an addition of Rs 257 billion to money market liquidity which was equivalent to an around 3.7 per cent reduction in cash reserve ratio.

"Unless sterilised, such a large injection of liquidity would depress short-term interest rates to unsustainable lows," it said.

For the second time in two years, the Indian government has chosen to mobilise foreign exchange resources through the debt route by floating the IMD Scheme. The IMD issue was patterned on the lines of the State Bank of India's Resurgent India Bond (RIB) issue of August 1998, which had raised $4.16 billion.

If the RIB issue was prompted by the imposition of economic sanctions by the country's major trading partners following the nuclear tests, this time around, the compulsions included depleting foreign exchange reserves on the back of slowing inflows coupled by an increase in the dollar demand triggered by a sharp rise in the oil import bill, Crisil said.

The credit rating agency said the Reserve Bank of India (RBI) was expected to extensively use Open Market Operations (OMO) as a monetary tool to absorb excess liquidity, which could stabilise interest rates. The OMOs would also enable the central bank to reduce the amount of securities that it currently holds through devolvements and private placement, reducing the net RBI credit to the government. In addition, the RBI can conduct the remaining government borrowing programme with relative ease, it added.

(PTI)